A Model of Two-Sided Costly Communication for Building New Product Category Demand

When a firm introduces a radical innovation, consumers are unaware of the product’s uses and benefits. Moreover, consumers are unsure of whether they even need the product. In this situation, we consider the role of marketing communication as generating consumers’ need recognition and thus market demand for a novel product. In particular, we model marketing communication as a two-sided process that involves both firms’ and consumers’ costly efforts to transmit and assimilate a novel product concept. When the marketing communication takes on a two-sided process, we study a firm’s different information disclosure strategies for its radical innovation. We find that sharing innovation, instead of extracting a higher rent by keeping the idea secret, can be optimal. A firm may benefit from the presence of a competitor and its communication effort. The innovator can share its innovation so that competitors can also benefit, which encourages rivals to enter the market. The presence of such competition guarantees a higher surplus for consumers, which can induce greater consumer effort in a two-sided communication process. Moreover, the increased consumer effort, in turn, prompts complementarity in the communication process and lessens the potential free-riding effect in communication between firms. Additionally, it encourages the rival firm to exert more effort, especially when the role of consumers becomes more important. Sharing innovation with a rival serves as a mechanism to induce more efforts in a two-sided communication process.