Sharing the Wealth: When Should Firms Treat Customers as Partners?
Marketers often stress the importance of treating customers as partners. A fundamental premise of this perspective is that all parties can be weakly better off if they work together to increase joint surplus and reach Pareto-efficient agreements. For marketing managers, this implies organizing marketing activities in a manner that maximizes total surplus. This logic is theoretically sound when agreements between partners are limitless and costless. In most consumer marketing contexts (business-to-consumer), this is typically not true. The question I ask is should one still expect firms to partner with consumers and reach Pareto-efficient agreements? In this paper, I use the example of a firm's choice of product configuration to demonstrate two effects. First, I show that a firm may configure a product in a manner that reduces total surplus but increases firm profits. Second, one might conjecture that increased competition would eliminate this effect, but I show that in a duopoly firm profits may be increasing in the cost of product completion. This second result suggests that firms may prefer to remain inefficient and/or stifie innovations. Both results violate a fundamental premise of partnering---that firms and consumers should work together to increase total surplus and reach Pareto-efficient agreements. The model illustrates that Pareto-efficient agreements are less likely to occur if negotiation with individual partners is infeasible or costly, such as in business-to--consumer contexts. Consumer marketers in one-to- many marketing environments should be wary of treating customers as partners because Pareto--efficient agreements may not be optimal for their firm.
Volume (Year): 48 (2002)
Issue (Month): 8 (August)
|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.:
- Roger B. Myerson & Mark A. Satterthwaite, 1981.
"Efficient Mechanisms for Bilateral Trading,"
469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Ariel Rubinstein, 2010.
"Perfect Equilibrium in a Bargaining Model,"
Levine's Working Paper Archive
252, David K. Levine.
- K. Sridhar Moorthy, 1987. "Comment—Managing Channel Profits: Comment," Marketing Science, INFORMS, vol. 6(4), pages 375-379.
- Anderson, Erin, 1988. "Transaction costs as determinants of opportunism in integrated and independent sales forces," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 247-264, April.
- Rubinstein, Ariel, 1985. "A Bargaining Model with Incomplete Information about Time Preferences," Econometrica, Econometric Society, vol. 53(5), pages 1151-1172, September.
- Kalyan Chatterjee & Larry Samuelson, 1987. "Bargaining with Two-sided Incomplete Information: An Infinite Horizon Model with Alternating Offers," Review of Economic Studies, Oxford University Press, vol. 54(2), pages 175-192.
- Cabral, L.M.B., 2001.
"Multiproduct Oligopoly and Bertrand Supertraps,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
01-04, New York University, Leonard N. Stern School of Business-.
- William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:48:y:2002:i:8:p:955-971. 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.