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Cheap Talk and Bogus Network Externalities in the Emerging Technology Market

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  • Xiaotong Li

    () (College of Administrative Science, The University of Alabama in Huntsville, Huntsville, Alabama 35899)

Abstract

Many emerging technologies exhibit path-dependent demands driven by positive network feedback. Such network effects profoundly impact marketing strategists' thinking in today's network economy. However, the significant network externalities expected by many people often fail to materialize in the emerging technology market. We analyze this phenomenon in the context of a technology distribution channel. By studying cheap-talk strategies under information asymmetry, we show that incentive-compatible contracts are essential for achieving credible information transmission. In our model, the better-informed technology vendor has an incentive to inflate the retailer's ex ante belief of network externalities when a wholesale price contract is adopted. When properly termed revenue-sharing contracts are implemented, there are information-efficient cheap-talk equilibria where truthful information transmission is mutually beneficial. When the vendor's information is imperfect, even revenue-sharing contracts cannot guarantee credible information transmission if there is significant prior belief disparity between the vendor and the retailer. This study demonstrates how information-inefficient equilibria (e.g., information blockage) arise because of the conflict of interest or the conflict of opinion among channel members. It also explores the role of cheap talk in facilitating channel coordination.

Suggested Citation

  • Xiaotong Li, 2005. "Cheap Talk and Bogus Network Externalities in the Emerging Technology Market," Marketing Science, INFORMS, vol. 24(4), pages 531-543, October.
  • Handle: RePEc:inm:ormksc:v:24:y:2005:i:4:p:531-543
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    File URL: http://dx.doi.org/10.1287/mksc.1050.0118
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ajay Kalra & Shibo Li, 2008. "Signaling Quality Through Specialization," Marketing Science, INFORMS, vol. 27(2), pages 168-184, 03-04.
    2. Leng, Mingming & Zhu, An, 2009. "Side-payment contracts in two-person nonzero-sum supply chain games: Review, discussion and applications," European Journal of Operational Research, Elsevier, vol. 196(2), pages 600-618, July.
    3. Sumit Raut & Sanjeev Swami & Eunkyu Lee & Charles B. Weinberg, 2008. "How Complex Do Movie Channel Contracts Need to Be?," Marketing Science, INFORMS, vol. 27(4), pages 627-641, 07-08.
    4. Ramesh Sankaranarayanan, 2007. "Innovation and the Durable Goods Monopolist: The Optimality of Frequent New-Version Releases," Marketing Science, INFORMS, vol. 26(6), pages 774-791, 11-12.
    5. Clark, Derek J. & Nilssen, Tore & Sand, Jan Yngve, 2012. "Motivating over Time: Dynamic Win Effects in Sequential Contests," Memorandum 28/2012, Oslo University, Department of Economics.
    6. repec:eee:tefoso:v:129:y:2018:i:c:p:285-296 is not listed on IDEAS
    7. Shamir, Noam, 2012. "Strategic information sharing between competing retailers in a supply chain with endogenous wholesale price," International Journal of Production Economics, Elsevier, vol. 136(2), pages 352-365.
    8. Kenneth C. Wilbur, 2008. "A Two-Sided, Empirical Model of Television Advertising and Viewing Markets," Marketing Science, INFORMS, vol. 27(3), pages 356-378, 05-06.
    9. Abel P. Jeuland & Steven M. Shugan, 2008. "Commentary—Managing Channel Profits," Marketing Science, INFORMS, vol. 27(1), pages 49-51, 01-02.
    10. Liang Guo, 2009. "The Benefits of Downstream Information Acquisition," Marketing Science, INFORMS, vol. 28(3), pages 457-471, 05-06.
    11. Sanjay Jain, 2008. "Digital Piracy: A Competitive Analysis," Marketing Science, INFORMS, vol. 27(4), pages 610-626, 07-08.
    12. Tingting He & Dmitri Kuksov & Chakravarthi Narasimhan, 2012. "Intraconnectivity and Interconnectivity: When Value Creation May Reduce Profits," Marketing Science, INFORMS, vol. 31(4), pages 587-602, July.
    13. Chuan He & Johan Marklund & Thomas Vossen, 2008. "—Vertical Information Sharing in a Volatile Market," Marketing Science, INFORMS, vol. 27(3), pages 513-530, 05-06.
    14. Clark, Derek J. & Nilssen , Tore & Sand, Jan Yngve, 2014. "Keep on Fighting: Dynamic Win Effects in an All-Pay Auction," Memorandum 23/2014, Oslo University, Department of Economics.
    15. Steven M. Shugan, 2006. "Editorial: Save Research—Abandon the Case Method of Teaching," Marketing Science, INFORMS, vol. 25(2), pages 109-115, 03-04.

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