When Good News About Your Rival Is Good for You: The Effect of Third-Party Information on the Division of Channel Profits
The Internet has led to a large number of third-party sources that offer high-quality information about firms's products at little or no cost to consumers. As a result, many of these sources have grown in popularity, extending well-beyond the usual reach of traditional third parties such as and . For example, the online version of offers, at no cost to consumers, information about new products, existing products, long-term tests, and buyers' guides, all relating to the automotive industry. AvWeb.com delivers weekly aviation news and new product reviews to its readers, and a large number of websites follow developments on computer platforms such as the Apple Macintosh. In this paper we analyze how the provision of third-party information affects the division of profits in a multiproduct distribution channel. To illustrate, consider the competition between Microsoft and Apple in the operating systems (OS) market and their channel relationship to CompUSA, a retailer that sells both Macs and Windows-based PCs. Consider two pieces of thirdparty information. First, suppose that CNET, an Internet technology site, reviews the newest upgrade of the MacOS and writes that the new user interface is even easier to use than previously. Second, suppose that an article in the technology section of the notes that changes in Apple's networking support now enable Macs to be better integrated into PC networks. These two pieces of information are similar in the sense that they both express good news about the MacOS and thus they both can be expected to benefit Apple by increasing consumer demand for Macs. One might also expect that in both cases CompUSA will capture some of the gains that come from the increased demand for Macs and that Microsoft will lose because the good news about the MacOS will induce some consumers to choose Macs over Windows-based PCs. However, we will show that this intuition is incorrect. The two reviews can have surprisingly different implications for the profits of Microsoft and CompUSA. The reason is that the two reviews differ on one crucial dimension: the group of customers for whom they are primarily relevant. The CNET review talks about improvements in the customer interface—precisely what Apple's consumers care about. The review talks about compatibility with prevailing PC standards—important to consumers who care relatively more about compatibility and who are thus more likely to prefer Windows (Apple's consumers). We show that good news about the MacOS that is more relevant to Apple's core consumers (the CNET review) benefits Microsoft but harms CompUSA, while good news about the MacOS that is more relevant to Apple's noncore consumers (the review) has the opposite effect. It harms Microsoft but benefits CompUSA. Stated more generally, our main result is that when third-party information affects consumers' product valuations, the type of information that induces the change is critical to understanding which firms gain and which firms lose. In particular, depending on the type of third-party information, we find that (1) a retailer can be harmed by good news about a product that it carries; (2) a manufacturer can gain from good news about a rival's product; and (3) good news about a product category need not benefit all the manufacturers in that category. There are three novel features of the analysis. First, we derive the equilibrium division of profit among firms when a retailer sells the products of competing manufacturers, and we have done so while placing few restrictions on the feasible set of contracts. Second, we show how this equilibrium division of profit lends itself to a simple graphical interpretation that depicts which firms gain and which firms lose from third-party information. Third, we provide a taxonomy of information types and identify the key features of each type that cause profit incentives to vary. In particular, we conceptualize information as having three components, namely (1) the products to which the information pertains, (2) whether the information is positive or negative, and (3) the consumers to whom the information is relevant. We show that all three information components play a role in determining the change in each firm's profit. Our framework can also be used to analyze a variety of other settings of interest; for example, it can be used to analyze profit incentives when the retailer has bargaining power, when there is downstream competition, and when there are non-information-based changes in consumers' valuations. In addition, our framework may be used both to analyze the effects on profits of persuasive advertising and to predict advertising content.
Volume (Year): 21 (2002)
Issue (Month): 3 (November)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Anne T. Coughlan, 1985. "Competition and Cooperation in Marketing Channel Choice: Theory and Application," Marketing Science, INFORMS, vol. 4(2), pages 110-129.
- Chaim Fershtman & Kenneth L Judd, 1984.
"Equilibrium Incentives in Oligopoly,"
642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Ganesh Iyer, 1998. "Coordinating Channels Under Price and Nonprice Competition," Marketing Science, INFORMS, vol. 17(4), pages 338-355.
- K. Sridhar Moorthy, 1987. "Comment—Managing Channel Profits: Comment," Marketing Science, INFORMS, vol. 6(4), pages 375-379.
- S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
- Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
- Charles A. Ingene & Mark E. Parry, 1995. "Channel Coordination When Retailers Compete," Marketing Science, INFORMS, vol. 14(4), pages 360-377.
- Daniel P. O'Brien & Greg Shaffer, 1997. "Nonlinear Supply Contracts, Exclusive Dealing, and Equilibrium Market Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 755-785, December.
- Sudheer Gupta & Richard Loulou, 1998. "Process Innovation, Product Differentiation, and Channel Structure: Strategic Incentives in a Duopoly," Marketing Science, INFORMS, vol. 17(4), pages 301-316.
- Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
- Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 63-81.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:21:y:2002:i:3:p:273-293. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.