Democracy in Product Design: Consumer Participation and Differentiation Strategies

49 Pages Posted: 13 Feb 2012 Last revised: 2 Apr 2013

See all articles by Zsolt Katona

Zsolt Katona

University of California, Berkeley - Haas School of Business

Date Written: February 12, 2013

Abstract

An increasing number of firms use social media to allow their customers to vote on new product design. This paper studies the implications of employing such a democratic product design (DPD). A linear city model is used with random locations to capture uncertainty about consumer preferences and to study strategic forces in monopoly and duopoly settings. The results indicate that a monopolist will use market research to resolve the demand uncertainty, unless DPD provides a cost advantage. In duopoly, an asymmetric equilibrium emerges with exactly only one firm using DPD. Commitment to following consumer votes proves to be a strategic advantage, therefore at least one firm promises not to deviate from the product design consumers voted for. One firm would even self-impose a penalty in order to prevent future deviations. Firm profits are generally hurt by the use of DPD. The role of strategic consumer participation in voting is also explored. The results show that a monopolist prefers an intermediate level of participation cost to ensure an optimal product. In contrast, duopolists are best off when participation costs are very low or very high, because this allows them to avoid using DPD.

Keywords: Consumer participation, product design, uncertainty

JEL Classification: D72, L11, M31

Suggested Citation

Katona, Zsolt, Democracy in Product Design: Consumer Participation and Differentiation Strategies (February 12, 2013). Available at SSRN: https://ssrn.com/abstract=2004073 or http://dx.doi.org/10.2139/ssrn.2004073

Zsolt Katona (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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