Intraconnectivity and Interconnectivity: When Value Creation May Reduce Profits

Posted: 24 Oct 2012

See all articles by Tingting He

Tingting He

University of Wisconsin - Milwaukee

Dmitri Kuksov

Washington University in St. Louis - John M. Olin Business School

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School

Date Written: 2012

Abstract

This paper analyses firms' decisions to provide connectivity to their customers. We distinguish between intraconnectivity — the ability of one firm's customers to connect to each other— and interconnectivity — the ability of one firm's customers to connect with another firm's customers. The profitability implications of allowing connectivity are not a straightforward consequence of the consumer value of connectivity, because connectivity affects not only the customer value but also the intensity of competition by creating or changing network externality. We find that if sales are driven by brand switching rather than by category expansion, a firm may find it optimal not to provide intraconnectivity even if providing it is not costly and may find it optimal to provide interconnectivity even at a cost exceeding the consumer value of connectivity. On the other hand, if category expansion is possible, providing intraconnectivity may be profitable. In this case, either the equilibrium intraconnectivity provision may be asymmetric or both firms may find it (individually) optimal to provide intraconnectivity. Under certain conditions in the latter case, the firms' choice of intraconnectivity is a prisoner's dilemma game.

Keywords: network externality, product design, pricing, competitive strategy, game theory

Suggested Citation

He, Tingting and Kuksov, Dmitri and Narasimhan, Chakravarthi, Intraconnectivity and Interconnectivity: When Value Creation May Reduce Profits (2012). Marketing Science, Vol. 31, No. 4, 2012; pp. 587-602; DOI: 10.1287/mksc.1120.0705, Available at SSRN: https://ssrn.com/abstract=2160748

Tingting He (Contact Author)

University of Wisconsin - Milwaukee ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States

Dmitri Kuksov

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive, Campus Box 1133
Olin School of Business
St. Louis, MO 63130-4899
United States
314-935-6313 (Phone)
314-935-6359 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
478
PlumX Metrics