TITLE

When Good News About Your Rival Is Good for You: The Effect of Third-Party Information on the Division of Channel Profits

AUTHOR(S)
Shaffer, Greg; Zettelmeyer, Florian
PUB. DATE
June 2002
SOURCE
Marketing Science;Summer2002, Vol. 21 Issue 3, p273
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The Internet has led to a large number of third-parts' sources that offer high-quality information about firms's products at little or no cost to consumers. As a result, many of these sources have grown in popularity, extending well-beyond the usual reach of traditional third parties such as Consumer Reports and Kelly's Blue Book. For example. the online version of Edmunds offers, at no cost to consumers, information about new products, existing products. long-term tests, and buyers guides, all relating to the automotive industry. AvWeb.com delivers weekly aviation news and new product reviews to its readers, and a large number of websites follow developments on computer platforms such as the Apple Macintosh. In this paper we analyze how the provision ot third-party information affects the division of profits in a multiproduct distribution channel. To illustrate, consider the competition between Microsoft and Apple in the operating systems (OS) market and their channel relationship to CompUSA, a retailer that sells both Macs and Windows-based PCs. Consider two pieces of third- parts' information. First, suppose that CNET, an Internet technology site, reviews the newest upgrade of the MacOS and writes that the new user interface is even easier to use than previously. Second, suppose that an article in the technology section of the Wail Street Journal notes that changes in Apple's networking support now enable Macs to be better integrated into PC networks. These two pieces of information are similar in the sense that they both express good news about the MacOS and thus they both can be expected to benefit Apple by increasing consumer demand for Macs. One might also expect that in both cases CompUSA will capture some of the gains that come from the increased demand for Macs and that Microsoft will lose because the good news about the MacOS will induce sonic consumers to choose Macs over Windows-based PCs. However, we will show that this intuition is incorrect. The two reviews can have surprisingly different implications for the profits of Microsoft and CompUSA. the reason is that the two reviews differ on one crucial dimension: the group of customers for whom they are primarily relevant. The CNFT review talks about improvements in the customer interface-precisely what Apple's core consumers care about. The Wall Street Jourual review talks about compatibility with prevailing PC standards -Important to consumers who care relatively more about compatibility and who are thus more likely to prefer Windows (Apple's noncore consumers). We show that good news about the MacOS that is more relevant to Apple's core consumers (the CNET review) benefits Microsoft hut harms CompUSA, while good news about the MacOS that is more relevant to Apple's non-core consumers (the Wall Street Journal review) has the opposite effect. It harms Microsoft but benefits CompUSA. Stated more generally our main result is that when third-party information affects consumers' product valuations, the type of information that induces the change is critical to understanding which firms gain and which firms lose. In particular, depending on the type of third-party information, we find that (1) a retailer can he harmed by good news about a product that it carries; (2) a manufacturer can gain from good news about a rival a product; and (3) good news about a product category need not benefit all the manufacturers in that category. There are three novel features of the analysis. First, we derive the equilibrium division of profit among firms when a retailer sells the products of competing manufacturers, and we have done so while placing the restrictions on the feasible set of contracts. Second, We show how this equilibrium division ot profit lends itself to a simple graphical interpretation that depicts which firms gain and which firms lose from third-party information. third, we provide a taxonomy of information types and identify the key features of each type that cause profit incentives to vary. In particular, we conceptualize information as having three components, namely (1) the products to which the information pertains, (2) whether the information is positive or negative, and (3) the consumers to whom the information is relevant. We show that all three information components play a role in determining the change in each firm's profit. Our framework can also be used to analyze a variety of other settings of interest; for example, it can be used to analyze probit incentives when the retailer has bargaining power, when there is downstream competition, and when there are non-information-based changes in consumers' valuations. In addition, our frame- work may be used both to analyzed the effects on profits of persuasive advertising and to predict advertising content.
ACCESSION #
7497600

 

Related Articles

  • Draw up 'game plan,' then start new product development process.  // Marketing News;1/23/1981, Vol. 14 Issue 15, p6 

    Presents recommendations from Larry Wizenberg, senior associate at Bobrow Consulting Group Inc., on creating strategies for product development. Incorporation of technology and consumer desires in product development planning; Need for the product to be compatible with corporate image and...

  • Building A Successful Partner Channel Requires A Program Of TRUST. Faletra, Robert // CRN;1/16/2006, Issue 1179, p58 

    The article provides information on a piloting agent program "TRUST" that presents suggestions for achieving better service from the solution providers. The author informs that T stands for telling the solution provider about one's real long-term goals in the distribution channel. R stands for...

  • The Future of Licensing.  // License!;May2006, Vol. 9 Issue 4, pR32 

    The article presents the future of licensing from the viewpoint of Warner Bros. Consumer Products head Dan Romanelli. He foresees the future to be full of multiple platforms. He sees more potential for the Internet as a distribution channel and marketing avenue. He believes that the challenge...

  • Industry Basics: R&D and marketing.  // Pharmaceutical Representative;Feb2009, Vol. 39 Issue 2, p24 

    The article presents an overview of pharmaceutical research and development and the marketing process in the U.S. It highlights the clinical trial process, pharmacoeconomic studies, marketing life cycle, product promotion strategies as well as major pharmaceutical distribution channels. It...

  • 'Claim to Fame'. Rakow, Bob // Food & Drink;Fall2015, p90 

    The article features Herr Foods, a leader in the snack food industry and is known for its flavored potato chips. Lino Santinelli, director of transportation and logistics at Herr Foods, discusses the role of flavored chips in the success of the company and how they came up with new and...

  • HP adds dual-core processor to Opteron blades. McMillan, Robert // Network World;4/18/2005, Vol. 22 Issue 15, p61 

    The article reports that only days before the launch of Advanced Micro Devices' first dual-core Opteron microprocessor, Hewlett-Packard Co. began taking orders for a four-processor blade system that will use the chips, HP's new system, the ProLiant BL45p, will ship with a 2-GH2 dual-core...

  • REEL IN RISK with a broader view of SUPPLY CHAIN FLEXIBILITY. TRENT, ROBERT J. // Logistics Management;Nov2015, Vol. 54 Issue 11, p44 

    The article discusses ways for supply chain managers to take a wider view of supply chain flexibility through risk reduction. Topics covered include the negative effect of poor business continuity, supply chain design flexibility, and the integration of flexibility into business continuity...

  • Face the same way. Gregory, Annie // Works Management;May2011, Vol. 64 Issue 5, p56 

    The article focuses on the strategies and approaches employed by Revlon Inc., Repro Engineering, and CHH Conex in Great Britain. Revlon adopts the integrated business planning (IBP) process in its supply review meetings to evaluate its monthly services and sales, determine variances, and take...

  • Key Success Factors for Obtaining a One Tambon One Product Food Five-Star Rating in Phatthalung and Songkhla Provinces. Noknoi, Chetsada; Boripunt, Wannaporn; Lungtae, Sunchai // European Journal of Economics, Finance & Administrative Sciences;May2012, Issue 48, p96 

    The main purpose of the research is to study the key success factors for obtaining a One Tambon One Product (OTOP) food five-star rating, in terms of the characteristics of the community enterprise: management, marketing, production, product development, financial management and agency support....

Share

Read the Article

Courtesy of VIRGINIA BEACH PUBLIC LIBRARY AND SYSTEM

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics