Strategic Implications of Keeping Product Value Secret from Competitor’s Customers

Journal of Retailing 93(3) 382-399, September 2017

65 Pages Posted: 9 Sep 2016 Last revised: 19 Aug 2017

See all articles by Mushegh Harutyunyan

Mushegh Harutyunyan

Nazarbayev University Graduate School of Business

Baojun Jiang

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

Date Written: April 12, 2017

Abstract

Customers can sometimes learn unanticipated or hidden use value of a firm’s product whereas the non-customers remain uninformed about that extra value. A monopolist will increase its profit by informing the non-customers of its product’s hidden value. However, our analysis reveals that this may not be true when the firm faces competition in the market—the firm may actually make a higher profit if it keeps its hidden value secret from its competitor’s customers even if advertising to inform those customers is costless. This is because no advertising leads to information heterogeneity among consumers about the existence of the firm’s hidden value, which gives an incentive for both firms to continue targeting their own existing customers rather than poaching each other’s customers, alleviating price competition and increasing firms’ profits. This beneficial strategic effect of keeping some product value secret from the competitor’s customers can persist even when the firms anticipate the hidden value and compete more aggressively for customers in the early period. Our research suggests that firms can benefit from an “under-promise and over-deliver” strategy if they refrain from communicating their extra value to the competitor’s customers. Moreover, positive word of mouth about a firm’s product will not necessarily benefit the firm and can in fact make all firms worse off.

Keywords: dynamic pricing, competitive strategy, information disclosure, information asymmetry, advertising, targeting, word of mouth

Suggested Citation

Harutyunyan, Mushegh and Jiang, Baojun, Strategic Implications of Keeping Product Value Secret from Competitor’s Customers (April 12, 2017). Journal of Retailing 93(3) 382-399, September 2017. Available at SSRN: https://ssrn.com/abstract=2835830 or http://dx.doi.org/10.2139/ssrn.2835830

Mushegh Harutyunyan

Nazarbayev University Graduate School of Business ( email )

HOME PAGE: http://https://sites.google.com/view/harutyunyan

Baojun Jiang (Contact Author)

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

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

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