TY - JOUR
T1 - Impact of Social Interactions on Duopoly Competition with Quality Considerations
AU - Geng, Xin
AU - Guo, Xiaomeng
AU - Xiao, Guang
N1 - Funding Information:
History: Accepted by Matthew Shum, marketing. Funding: X. Guo received financial support from the Research Grants Council of Hong Kong [General Research Fund Grant PolyU 15507318]. G. Xiao received financial support from the Research Grants Council of Hong Kong [General Research Fund Grant PolyU 15503219]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2021.3972
Publisher Copyright:
© 2021 INFORMS
PY - 2022/2
Y1 - 2022/2
N2 - We study the impacts of social interactions on competing firms’ quality differentiation, pricing decisions, and profit performance. Two forms of social interactions are identified and analyzed: (1) market-expansion effect (MEE)—the total market expands as a result of both firms’ sales—and (2) value-enhancement effect (VEE)—a consumer gains additional utility of purchasing from one firm based on this firm’s previous and/or current sales volume. We consider a two-stage duopoly competition framework, in which both firms select quality levels in the first stage simultaneously and engage in a two-period price competition in the second stage. In the main model, we assume that each firm sets a single price and commits to it across two selling periods. We find that both forms of social interactions tend to lower prices and intensify price competition for given quality levels. However, MEE weakens the product-quality differentiation and is benign to both high-quality and low-quality firms. It also benefits consumers and improves social welfare. By contrast, VEE enlarges the quality differentiation and only benefits the high-quality firm, but is particularly malignant to the low-quality firm. It further reduces the consumers’ monetary surplus. Such impact is consistent, regardless of whether the VEE interactions involve previous or current consumers. We further discuss several model extensions, including dynamic pricing, combined social effects, and various cost structures, and verify that the aforementioned impacts of MEE and VEE are qualitatively robust to those extensions. Our results provide important managerial insights for firms in competitive markets and suggest that they need to not only be aware of the consumers’ social interactions, but also, more importantly, distinguish the predominant form of the interactions so as to apply proper marketing strategies.
AB - We study the impacts of social interactions on competing firms’ quality differentiation, pricing decisions, and profit performance. Two forms of social interactions are identified and analyzed: (1) market-expansion effect (MEE)—the total market expands as a result of both firms’ sales—and (2) value-enhancement effect (VEE)—a consumer gains additional utility of purchasing from one firm based on this firm’s previous and/or current sales volume. We consider a two-stage duopoly competition framework, in which both firms select quality levels in the first stage simultaneously and engage in a two-period price competition in the second stage. In the main model, we assume that each firm sets a single price and commits to it across two selling periods. We find that both forms of social interactions tend to lower prices and intensify price competition for given quality levels. However, MEE weakens the product-quality differentiation and is benign to both high-quality and low-quality firms. It also benefits consumers and improves social welfare. By contrast, VEE enlarges the quality differentiation and only benefits the high-quality firm, but is particularly malignant to the low-quality firm. It further reduces the consumers’ monetary surplus. Such impact is consistent, regardless of whether the VEE interactions involve previous or current consumers. We further discuss several model extensions, including dynamic pricing, combined social effects, and various cost structures, and verify that the aforementioned impacts of MEE and VEE are qualitatively robust to those extensions. Our results provide important managerial insights for firms in competitive markets and suggest that they need to not only be aware of the consumers’ social interactions, but also, more importantly, distinguish the predominant form of the interactions so as to apply proper marketing strategies.
KW - duopoly competition
KW - pricing
KW - product differentiation
KW - social interactions
UR - http://www.scopus.com/inward/record.url?scp=85132750364&partnerID=8YFLogxK
U2 - 10.1287/mnsc.2021.3972
DO - 10.1287/mnsc.2021.3972
M3 - Journal article
AN - SCOPUS:85132750364
SN - 0025-1909
VL - 68
SP - 941
EP - 959
JO - Management Science
JF - Management Science
IS - 2
ER -