Article ID: | iaor20032415 |
Country: | United States |
Volume: | 48 |
Issue: | 8 |
Start Page Number: | 955 |
End Page Number: | 971 |
Publication Date: | Aug 2002 |
Journal: | Management Science |
Authors: | Anderson Eric T. |
Keywords: | customer care |
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 stifle 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.