Selling Smart and Connected Products: A Value Chain Perspective

29 Pages Posted: 15 Sep 2022

See all articles by Zhuoran Lu

Zhuoran Lu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Yifan Dou

Fudan University - School of Management

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business

Jian Chen

Tsinghua University - School of Economics and Management

Date Written: August 31, 2022

Abstract

The rise of smart and connected products has led to unprecedented data richness and the ever-increasing product connectivity, which catalyze the emergence of the data network effect and present a fresh opportunity for product innovation. This paper investigates whether and how connected product providers can leverage the data network effect through the optimal interplay of selling and innovation strategies. In the model, in a two-tier value chain, a manufacturer and a retailer sequentially choose their respective strategies to sell a smart product that exhibits data network effect. In the short-run analysis where the product connectivity is fixed, we show that, surprisingly, the value chain can achieve efficient strategic coordination under a conventional wholesale-price contract when the product connectivity is relatively high. In the long-run analysis where the manufacturer can engineer the strength of network effect through data analytics, the decentralized value chain may achieve greater social welfare than the integrated one, because the manufacturer with a high innovation capability would invest more aggressively in the product connectivity to mitigate the retailer's pricing externality. This implies that the classic double marginalization problem has an unexpected beneficial effect by enhancing productive investments for smart and connected products.

Keywords: Smart and Connected Product, Value Chain, Pricing, Engineering Network Effects, Connectivity

JEL Classification: L10

Suggested Citation

Lu, Zhuoran and Dou, Yifan and Wu, D. J. and Chen, Jian, Selling Smart and Connected Products: A Value Chain Perspective (August 31, 2022). Available at SSRN: https://ssrn.com/abstract=4205529 or http://dx.doi.org/10.2139/ssrn.4205529

Zhuoran Lu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

HOME PAGE: http://www.zhuoranlu.com/

Yifan Dou (Contact Author)

Fudan University - School of Management ( email )

670 Guoshun Rd
Yangpu District
Shanghai, Shanghai 200433
China

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business ( email )

800 West Peachtree Street, NW
Atlanta, GA 30308
United States
404-894-4364 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://scheller.gatech.edu/wu

Jian Chen

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

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