Consumer Social Sharing and Brand Competition

Transcription

1 Consumer Socal Sharng and Brand Competton Jane Gu Unversty of Connectcut 2100 Hllsde Road, UNIT 1041 Storrs, CT, Emal: Tel: (860) and Xnxn L Unversty of Connectcut 2100 Hllsde Road, UNIT 1041 Storrs, CT, Emal: Xnxn.l@busness.uconn.edu Tel: (860) March,

2 Consumer Socal Sharng and Brand Competton Abstract Ths study nvestgates how modern consumers socal sharng actvtes on dgtal platforms such as Facebook and Instagram affect consumers product choce decsons and market competton. We consder two consumer socal sharng behavors wth dentty revealng consequences. Frst, modern consumers commonly publcze on socal meda ther assocatons wth products of dstnct brand mages, whch has the effect of suggestng ther denttes to the publc. Such dentty suggeston allows consumers to derve a socal utlty n addton to the consumpton utlty from buyng a branded product, although dentty suggeston based on product assocaton may also cause msdentfcaton and consequently a socal loss. Second, modern consumers can also publcze ther opnons on socal meda, whch has the effect of drectly announcng ther denttes to the publc. Such dentty announcement allows consumers to derve a socal utlty even f they do not buy any product. Our analyss shows that consumers dentty-revealng socal sharng behavors affect frms at dfferent competton status dfferently. Compared to the case of no socal sharng, when consumers publcze product assocatons on socal meda, the socal utlty they derve from dentty suggeston allows the frm wth a large loyal segment to obtan a greater proft. The frm wth a small loyal segment, however, can be worse off when ts loyal segment s not too large or too small and the premum n a product s loyal customers wllngness to pay over that of swtchers s not too hgh or too low. When consumers publcze opnons n addton to product assocatons on socal meda, the socal utlty consumers derve from drect dentty announcement attenuates the postve mpact of dentty suggeston on frm proft, and may also reduce the negatve mpact of dentty suggeston. The ncremental effect of drect dentfy announcement depends on the effectveness of such announcement n revealng consumers true denttes. Keywords: Socal Sharng, Identty Revelaton, Socal Utlty, Compettve Strateges, Game Theory

3 1 Introducton Dgtal socal meda platforms, such as Facebook, Twtter, and Instagram have become major stages of consumer self-expresson. As of 2015, Facebook has 1,490 mllon users worldwde and Instagram has 300 mllon users. A study reports that people n the U.S. check ther Facebook, Twtter, and other socal meda accounts about 17 tmes a day, or at least once every wakng hour. 1 Another study shows that an average Amercan spends 42 mnutes a day on Facebook, 21 mnutes on Instagram, and 17 mnutes on Twtter. 2 The large and actve audence on dgtal socal meda motvates modern consumers to publcze ther personal lves through socal sharng. Consumers post on socal meda platforms selfes taken n publc settngs such as restaurants, beaches, and gyms, as well as n prvate settngs such as ktchens, bedrooms, and bathrooms. 3 Consumers also unavodably show up n other people s selfes, whch leads to passve socal sharng of ther personal lves. 4 It s reported that each day, 1 mllon selfes were taken and shared on Facebook, Twtter, Instagram, and other platforms globally n the 18 to 24 year-old age demographc. Inspred by the ncreasngly prevalent behavors among modern consumers to express themselves through socal sharng, our study sets out to nvestgate the strategc mpact of such dentty-revealng socal sharng behavors. Whle exstng studes manly focus on the role of socal meda for nformaton dssemnaton and examne how word of mouth on socal meda can drve product dffuson (e.g., Katona, Zubcsek, and Sarvary 2011; Rsselada, Verhoef and Bjmolt. 2014), our study takes a dstnct perspectve and focuses on the role of socal meda for dentty expresson. In partcular, we ask the followng questons. Frst, how do consumers socal sharng behavors on dgtal platforms by facltatng dentty revelaton affect consumers product choce behavors? Moreover, how do such dentty-revealng socal sharng behavors of modern consumers affect market competton? And lastly, how do frms devse effectve marketng strateges to cope wth such consumer socal sharng behavors n the dgtal age? Generatng and sharng content on socal meda has become an everyday routne for modern consumers. A key motve behnd such behavors s self-expresson (Matkanen 2015). The varous socal sharng actvtes on dgtal platforms nevtably reveal consumers denttes to the publc. We consder two types of consumer socal sharng actvtes that lead to dentty revelaton. Frst,

4 modern consumers often share ther assocaton wth a branded product on socal meda, whch has the effect of suggestng ther dentty. For example, when a consumer posts a pcture that shows her wearng Nke sneakers, vewers are lkely to perceve the consumer s dentty as algned wth Nke s brand mage. On the other hand, f the consumer posts a pcture that shows her wearng Addas sneakers, vewers are lkely to have a dfferent percepton of the consumer s dentty, gven Addas s dfferent brand mage. Wth the extensve adopton of socal meda n the modern socety, a pcture posted on Facebook, Twtter, or Instagram allows a consumer s dentty suggested by her product assocaton to be publczed among a wde audence through drect and ndrect socal connectons. For example, Facebook profles attract nearly 4.5 bllon vews every day. 5 Ths dentty suggeston consequence of publczng product assocatons allows modern consumers to derve a socal utlty, n addton to the consumpton utlty, from purchasng a product. The mcro-mechansm behnd such product socal utlty derved from product assocaton has been demonstrated n Kuksov (2007). Moreover, the user-generated nature of socal sharng content means ndvduals can publcze ther assocatons wth a wde range of products, ncludng publc products such as apparel and cars as well as prvate products such as beddng and home furnture. As such, socal utltes can exst for a wde range of products. The recent growth of the streetwear market demonstrates the unque strategc mplcatons of socal utlty derved from dentty suggeston. Orgnated from the street cultures n the 80 s, the streetwear apparel ndustry had remaned mostly underground before onlne socal meda took off. Compared to typcal fashon brands, streetwear brands stand out wth ther bg, colorful, and eyecatchng logos, whch allow for easy brand recognton and dentty suggeston. For example, the popular streetwear brand Supreme was orgnated from New York skate boardng culture, and one wearng ts red-and-whte logo can be easly dentfed wth cool New York skate boarders. Another well-known streetwear brand Stussy s rooted n the west coast surfng culture, and beng seen wearng ts bg hand-style Logo allows one to be dentfed wth the Calforna Surfers. Fgure 1 presents examples of Supreme and Stussy clothes. In the past 10 years, along wth the explosve growth of onlne socal meda and socal sharng behavors, the streetwear market has experenced exponental growth. In 2011, the streetwear market was estmated by Reuters to have a value of $60 bllon (Barr 2011). A recent report shows that streetwear ndustry valued over $70 bllon for the year of 2012 and closer to $75 bllon for the year of 2013 (USA Streetwear Market 5 4

5 Fgure 1: Examples of Supreme and Stussy clothes Research Report 2015). 6 In 2016, streetwear has made nto manstream, beng seen wth celebrtes and fashon edtors. Compared to typcal fashon brands, streetwear brands are prcey. A Supreme sweatshrt featurng ts logo typcally costs $150-$190. Contrary to tradtonal busness ntellgence, the hgh prce pont s often met wth moderate qualty and poor servce. Supreme s known for ts outrageous store polcy of come n, don t touch; you can look wth your eyes but not wth your hands. 7 Its store n SOHO, New York has receved a poor ratng of only 3 out of 5 on Yelp.com and tons of complants about the dsorganzed store and rude sales staff. 8 These evdence suggests that the hgh prce pont of streetwear brands s justfed by the socal utlty they generate for buyers rather than the consumpton utlty. The socal utlty that consumers derve from dentty suggeston has nterestng mplcatons for frms compettve strateges. To start wth, the beneft of suggestng dentty ncreases consumers wllngness to pay for a branded product. Ths dentfcaton eff ect allows frms to charge a hgher prce for ther products, leadng to a postve mpact on frm proft. Nonetheless, when a product s purchased by multple groups of consumers wth dfferent denttes, a buyer s dentty or group membershp s also lkely to be msdentfed, causng a socal loss and consequently lowerng 6 (accessed July 1, 2016). 7 %E2%80%94-part- (accessed July 1, 2016). 8 (accessed July 1, 2016). 5

6 consumers wllngness to pay for the product. Ths msdentfcaton eff ect forces the frm that desres to sell to multple consumer groups to lower ts product prce, causng a negatve mpact on frm proft. Lastly, facng choces between two competng products of the same consumpton value, consumers have a stronger ncentve to buy a product wth whch they expect a smaller chance of beng msdentfed. The exstence of socal utlty thus generates product dfferentaton and consequently allevates frm competton. Ths competton allevaton eff ect allows competng frms to charge hgher prces for ther products, leadng to a postve mpact on frm proft. The net effect of socal utlty derved from dentty suggeston depends on the relatve strengths of the three competng forces. When the two postve effects domnate the negatve one, a frm s able to charge a hgher prce for ts product wthout ncreasng ts product qualty. Besdes publczng product assocatons, modern consumers also publcze ther opnons on socal meda, whch has the effect of drectly announcng ther denttes. For example, consumers commonly use the lke or the share button on Facebook to publcze ther support for a product, an event, or an artcle. Consumers also publcze ther opnons by postng statements and comments. A survey by Pew Research Center reports that 44% of Facebook users lke content posted by ther frends at least once a day, wth 29% dong so several tmes per day; moreover, 31% of Facebook users comment on other people s posts on a daly bass, wth 15% dong so several tmes a day (Smth 2014). Montorng a consumer s socal opnons over tme and across varous platforms helps reveal the consumer s true dentty. Such drect dentty announcement attenuates the effects of dentty suggeston obtaned through publczed product assocatons. Nonetheless, dscoverng one s true dentty through socal lstenng typcally nvolves hgh monetary and tme cost that s not affordable to everyone. As such, publczng opnons s not always effectve n revealng one s dentty. We buld a stylzed model to nvestgate the strategc mplcatons of dentty-revealng consumer socal sharng behavors for consume choce decsons and frm competton. We consder a market where two frms compete to sell ther horzontally dfferentated products to a market of consumers wth heterogeneous product preferences. Each frm enjoys exclusve demand from a segment of loyal customers who have stronger preferences for ts product over ts rval s product, and also compete for demand n a swtcher segment wth moderate but ndfferent preferences for the two products. A frm s loyal customers exhbt a loyalty premum, or a premum n wllngness to pay for the frm s product than swtchers. The product preference of a consumer group reflects ts group members unque dentty. A consumer derves a socal gan when her dentty or group membershp s correctly 6

7 recognzed by the publc and suffers a socal loss when her group membershp s msdentfed. In the benchmark case where no socal sharng exsts, consumers derve only a consumpton utlty from buyng a product. In the man model where dgtal socal meda allow consumers to publcze product assocatons, consumers derve a socal utlty from dentty suggeston when they buy a product, n addton to a consumpton utlty. A consumer s socal utlty from buyng a product s postvely assocated wth the number of consumers n her own group who buy the same product and negatvely assocated wth the number of consumers n other groups who also buy the product. We then consder an extended model where consumers not only suggest denttes through publczng product assocatons but announce denttes drectly through publczng opnons on socal meda. In ths case, consumers derve a socal utlty from drect dentty announcement even when they do not buy any product. Our analyss generates a set of nterestng results. Frst, we fnd that consumers socal sharng actvtes of publczng product assocatons, by suggestng denttes and generatng socal utltes for product purchases, affect frms at dfferent competton status dfferently. For the frm wth a larger loyal segment, the postve dentfcaton eff ect and competton allevaton eff ect of dentty suggeston always domnate the negatve msdentfcaton effect; as a result, the frm always obtans a greater proft, compared to the benchmark case of no socal sharng. For the frm wth a smaller loyal segment, however, the negatve effect of dentty suggeston can domnate the two postve effects and cause a proft loss f the frm s loyal segment s of ntermedate sze and the loyalty premum s of moderate magntude. Moreover, when the negatve effect of dentty suggeston domnates, the frm wth a small loyal segment loses ncentve to expand ts loyal segment. Second, we fnd that when consumers publcze ther opnons n addton to product assocatons on socal meda, the socal utlty that they derve from drect dentty announcement moderates the effects of dentty suggeston on frm profts. In partcular, when drect dentty announcement s not very effectve n revealng one s true dentty, the postve dentfcaton eff ect of dentty suggeston s reduced, lowerng both frms proft gans from consumers socal sharng actvtes. On the other hand, when drect dentty announcement s hghly effectve, the two postve effects and the one negatve effect of dentty suggeston are all reduced. In ths case, consumers socal sharng behavors never hurt ether frm s proft. Our study demonstrates nterestng strategc mpact of consumers socal sharng behavors that engender socal utltes of product purchases, and thus contrbutes to the research on products socal value. Kuksov (2007) demonstrates how publcly assocatng oneself wth a brand mage 7

8 can generate an economc value for an ndvdual n a matchng game. We adopt ths concept of product socal value to examne the self-expresson consequence of consumers socal sharng behavors on dgtal meda platforms, and nvestgate how socal utltes generated from socal sharng affects frm competton. Kuksov, Shachar, and Wang (2013) examnes a monopoly frm s strategy to reveal ts brand mage n a two-stage model where a products brand dentty depends on the composton of product buyers by the end of the second perod. Dfferent from ths study, our research consders two competng frms wth establshed brand mages and examne how frms devse compettve prcng strateges to sell to consumers who obtan socal values from publcly assocatng wth a product s brand mage. Our study examnes the market context where horzontally dfferentated consumer groups have heterogeneous preferences for products and no group wshes to be msdentfed wth any other groups. Whle ths market context has receved attenton from many consumer behavoral researchers (e.g., Escalas and Bettman 2005; Berger and Heath 2007, 2008), exstng modelng works have manly focused on vertcally dfferentated consumer groups and examne how the nteractons between the hgh group and the low group drve market dynamcs. For example, Karn and Schmedler (1990) shows that fashon cycles can arse n equlbrum when both hgh and low consumer groups value products used by hgh types but not those used by low types. Pesendorfer (1995) shows that a monopolst produces fashon n cycles to allow hgh types to sgnal ther wealth. Yoganarasmhan (2012) shows that when fashon s used to sgnal a good (vs. bad) taste, fashon frms may ntentonally cloakng ther products to preserve the sgnalng value of ts product. In these models, hgh-type consumers desre to dfferentate from the low-type and low-type consumers desre to mmc the hgh-type, whch s dstnct from our research context where consumer groups are horzontally dfferentated and no group desres to be msdentfed as other groups. Kuksov and Xe (2012) consders a model where two frms compete to sell ther status products to two segments of horzontally dfferentated hgh-type consumers. To mantan the hgh status of ther products, both frms wthhold from sellng to low-type consumers. Dfferent from ths study, n our model, both frms may have ncentve to sell to swtchers, who have lower wllngness to pay than the loyal customers but desre not to be msdentfed as the loyal customers. Our study examnes consumer socal networks bult on dgtal platforms as dentty expresson meda, and thus contrbutes to the lterature on socal networks. Pror research n socal networks has extended Bass (1969) model to examne the mpact of consumer socal networks n nducng socal contagon and acceleratng product adopton n markets such as telecommuncatons (Hll, 8

9 Provost, and Volnsky 2006; Rsselada, Verhoef, and Bjmolt 2014), onlne retalng (Bell and Song 2007; Cho, Hu, and Bell 2010), and pharmaceutcals (Iyengar, Van den Bulte, and Valente 2011). Ntzan and Lba (2011) shows that exposure to a defectng neghbor s assocated wth an ncrease n the defecton hazard. A few recent studes examne how the structure of consumer socal networks affect frm strateges. Galbreth, Ghosh, and Shor (2012) models how sharng of goods wthn a network of socal acquantances affects the prcng and proft of the producer of the good n dfferent types of socal networks (decentralzed, centralzed, and complete). Through feld experments, Aral and Walker (2011) examnes how frms can create socal contagon by desgnng vral features nto ther products and marketng campagns. Whle these studes focus on examnng the product nformaton dssemnaton consequence of socal nteractons, our study focuses on examnng the dentty expresson consequence of consumer socal sharng behavors on socal meda. Ths unque research perspectve helps brng nterestng nsghts regardng how frms can better sell to modern consumers for whom socal sharng actvtes have become an mportant part of everyday lfe. The rest of the paper proceeds as follows. In secton 2, we develop the man model that captures consumers socal sharng behavors of publczng product assocatons. In secton 3, we solve the man model to nvestgate the strategc mpact of dentty suggeston acheved through publczed product assocatons. Then n secton 4, we extend the man model to capture consumers socal sharng behavors of publczng opnons and examne the strategc mpact of drect dentty announcement caused by publczed opnons. Secton 5 concludes the study. 2 Model We consder two competng frms 1 and 2 that offer two branded products, 1 and 2, respectvely. The two products are characterzed by dfferentated horzontal features (e.g., style, brand mage). We normalze both manufacturers producton cost to zero. The consumer market has a unt mass and contans three consumer groups, A, B, and N, wth szes a, b, and n = 1 a b (0 < a < b < 1 a) respectvely. Each consumer has a unt demand. A group g (g = A, B, N) consumer s utlty for buyng product ( = 1, 2) s specfed as U g = V g + S g p. (1) In equaton (1), p s product s prce; V g captures the group g consumer s perceved consumpton 9

10 value of product j; S g captures the group g consumer s perceved socal value of product. Between the two products, a consumer buys the one that provdes the hghest non-negatve utlty. If the two products render the same non-negatve utlty, the consumer randomly chooses one to buy. Consumpton Value. The three groups of consumers have dfferent preferences for the two products, whch reflect ther horzontally dfferentated denttes. Group A consumers have a good ft wth product 1 and a bad ft wth product 2; ther perceved consumpton values of the two products are V A 1 = q(q > 0) and V A 2 = 0 respectvely. Group B consumers have a bad ft wth product 1 and a good ft wth product 2; ther perceved consumpton values of the two products are V B 1 = 0 and V B 2 = q respectvely. Group N consumers have a moderate ft wth both products and ther perceved consumpton values of the two products are V N 1 = V N 2 = (1 r)q, where 0 < r < 1. For convenence, we label Group A as loyal customers of product 1, group B as loyal customers of product 2, and Group N consumers as swtchers. Parameter r can be vewed as the loyalty premum, or the premum n a loyal customer s wllngness to pay for a product over a swtcher. Consumers derve zero consumpton value when they do not buy any product, V g 0 = 0 (g = A, B, N). Socal Value. A consumer perceves a socal value from buyng a product f the product purchase helps reveal her dentty captured by her preference for the two products. We consder two scenaros, NO and O. In scenaro NO, consumers denttes reman unknown to the publc. Ths s the case when onlne socal meda does not exst and consumers have no means to publcly dsclose ther denttes. In ths case, consumers perceve no socal value from buyng ether product, S NO.g 1 = S NO.g 2 = 0 (g = A, B, N); consumers also perceve no socal value f they do no by any product, S NO.g 0 = 0 (g = A, B, N). In Scenaro O, onlne socal meda s wdely adopted, whch causes publczng of consumers assocatons wth products they purchase. Identty suggeston occurs as a consequence. Smlar as n scenaro NO, consumers stll do not perceve any socal value f they do not buy any product, S O.g 0 = 0 (g = A, B, N). We assume that consumers do not desre to be assocated wth a product that offers a bad ft and derves a negatve socal value from buyng such a product. That s, when group A consumers buy product 2, S O.A 2 < 0, and when group B consumers buy product 1, S O.B 1 < 0. When group A consumers buy product 1, group B consumers buy product 2, or group N consumers buy ether product, the socal value a group g consumer derves from buyng product 10

11 s specfed as S O.g = M f g s. (2) In equaton (2), parameter M(M > 0) captures the socal gan a consumer perceves when her group membershp s perfectly dentfed. A larger M ndcates a greater beneft of dentty revelaton. Parameter s (s > M) captures the socal loss a consumer perceves when her group membershp s completely msdentfed. A larger s ndcates a greater socal loss from msdentfcaton, whch may be attrbuted to the greater dentty dfference between dfferent consumer groups. Parameter f g (0 f g j 1) captures the probablty of a group g consumer who buys product beng msdentfed. A consumer s dentty may be msrecognzed f more than one consumer groups buy the same product. We let D g and D g denote the sze of group g (g = A, B, N) consumers and non-group g consumers who buy product ( = 1, 2), and specfy the probablty of a group g consumer who buys product beng msdentfed as f g = D g D g + D g. (3) Equatons (2) and (3) together show that dentty suggeston can cause a net socal loss for group g consumers f a suff cently large number of non-group g consumers also buy product ; n partcular, S O.g < 0 f D g > M s M Dg. We focus on the nterestng case of r > s q where a product s loyal customers always have a hgher wllngness to pay than swtchers even when socal value s consdered. Game Sequence. The game proceeds as follows. Frst, frms 1 and 2 smultaneously decde the sellng prces, p 1 and p 2, for ther own products. And then consumers n all three groups make purchase decsons smultaneously, based on the two products prces p 1 and p 2, ther perceved consumpton values of the two products, V g 1 and V g 2, and ther expected socal values from buyng the products, E(S g 1 ) and E(Sg 2 ). 3 Model Analyss In ths secton, we examne how consumers socal sharng actvtes of publczng product assocatons, by suggestng ther denttes, affect ther product choce decsons and frm payoffs. 11

12 3.1 Scenaro NO: No socal sharng In ths case, consumers cannot reveal ther denttes to the publc and therefore do not derve any socal utlty. Consumers product choces solely depend on ther perceved consumpton values of products. Group A consumers are loyal to product 1 and ther utltes from buyng products 1 and 2 are respectvely U1 A = q p 1 and U2 A = p 2. (4) Group B consumers are loyal to product 2 and ther utltes from buyng the two products are respectvely U B 1 = p 1 and U B 2 = q p 2. (5) Group N consumers are swtchers and ther utltes from buyng the two products are respectvely U N 1 = (1 r)q p 1 and U N 2 = (1 r)q p 2. (6) And lastly, all consumers derve zero utlty f they do not buy any product, U A 0 = U B 0 = U N 0 = 0. (7) To facltate dscusson, we defne two mportant thresholds n consumers wllngness to pay from (4), (5), and (6). Defnton 1. In scenaro NO where no socal sharng exsts: () The hghest wllngness to pay of a product s loyal customers for the product s WLoyal NO = q. (8) () The swtchers hghest wllngness to pay for products 1 and 2 are WSwtch NO = (1 r)q. (9) Threshold WLoyal NO s the hghest prce that a frm can charge to generate demand. And W NO Swtch s the hghest prce that a frm can charge to generate demand from swtchers. We focus on the 12

13 case of p 1, p 2 WLoyal NO and derve consumer demand n the second stage as D NO 1 = a, D NO 2 = b f p 1, p 2 > W NO Swtch D NO 1 = a, D NO 2 = 1 a f p 2 < p 1 & p 2 W NO Swtch D NO 1 = a + b 2, D NO 2 = b + b 2 f p 2 = p 1 W NO Swtch D NO 1 = 1 b, D NO 2 = b f p 1 < p 2 & p 1 W NO Swtch. (10) As shown n equaton (10), when both products prces are hgher than WSwtch NO, group N consumers do not buy any product and each of the two frms sell to ts loyal customers only. Otherwse, when at least one product s prced lower than WSwtch NO, group N consumers buy the product wth a lower prce; the other product wth a hgher prce sells only to ts loyal customers. If the prces of the two products are equal and both lower than WSwtch NO, group N consumers choose the product to buy randomly. π NO In the frst stage of the game, each frm decdes ts product prce to maxmze ts total proft, = p D NO ( = 1, 2). Note that frm 1 can always get a demand of a from ts loyal customers n group A by chargng the hghest possble prce of p 1 = q. To get the demand of 1 a b from swtchers n group N, frm 1 has to lower ts prce to no hgher than (1 r)q, whch s proftable only f r < r NO = b 1 b. Smlarly, frm 2 can always get a demand of b from ts loyal customers n group B by chargng the hghest prce of p 2 = q, and has to lower ts prce to no hgher than (1 r)q to obtan demand from group N consumers, whch s proftable only f r < r NO = b. Snce a < b, we have r NO < r NO, that s, frm 1 wth a small loyal segment has a stronger ncentve to compete for the swtcher demand. We summarze the two frms equlbrum prces and market payoffs n the followng Lemma. Lemma 1. In scenaro NO where no socal sharng exts, n equlbrum: () (Local monopoly equlbrum) If the loyalty premum s suff cently large ( r r NO = b 1 b ), the two frms charge prces of p NO 1 = p NO 2 = q and obtan equlbrum profts of π NO 1 = qa and π NO 2 = qb respectvely. b () (Dfferentaton equlbrum) If the loyalty premum s n the ntermedate range ( r NO = r < r NO ), the two frms charge prces of p NO 1 = (1 r)q and p NO 2 = q and obtan equlbrum profts of π NO 1 = (1 r)q(1 b) and π NO 2 = qb respectvely. () (Competton equlbrum) If the loyalty premum s small ( r < r NO ), the two frms randomze ther prces n a mxed-strategy equlbrum and obtan equlbrum profts of π NO 1 = (1 b) qb 13

14 and π NF 2 = qb respectvely. Furthermore, πno 1 a > 0 n () and () and πno 1 a and (). Proof. See Appendx. = 0 n (); πno 2 b > 0 n cases (), (), Lemma 1 shows that the market equlbrum depends on the premum n loyal customers wllngness to pay over swtchers. In case () of Lemma 1, the loyalty premum s so large that frms have to make a bg prce cut to nduce demand from swtchers. As such, each frm s better off by mantanng a hgh prce and sellng to ts own loyal customers only. In case () of Lemma 1, the loyalty premum s so small that both frms have ncentves to sell to swtchers, causng prce competton. Interestngly, n case () of Lemma 1, the loyalty premum s n the ntermedate range (r NO r < r NO ), whch nduces only frm 1 wth a small loyal segment to sell to swtchers. case, the two frms do not compete, but dfferentate ther strategc focus. In ths In partcular, frm 1 wth a small loyal segment focuses on demand, sellng to both ts loyal segment A and the swtcher segment N, whereas frm 2 focuses on margn, sellng to ts loyal segment B only. The lack of competton for swtchers allows frm 1 to charge the hghest wllngness to pay of swtchers, p NO 1 = W NO Swtch = (1 r)q. Moreover, rno r NO = (b a)( b) ()(1 b) > 0 only f b a > 0. That s, the dff erentaton equlbrum arses only when the two competng frms have dfferent szes of loyal segments. And ths equlbrum becomes less lkely to arse when the sze dfference between the two frms loyal segments becomes smaller. Lemma 1 also shows that an expanded loyal segment does not always beneft a frm. In partcular, n the dff erentaton equlbrum, frm 1 does not beneft from convertng swtchers to ts loyal customers, πno 1 a = 0, because t sells to both. In the same equlbrum, frm 2 benefts from convertng swtchers to ts loyal customers, πno 1 b > 0, because a larger loyal segment allows t to enjoy a greater demand wthout reducng prce. In the other two equlbrum condtons, both frms beneft from expandng ther loyal segments. In partcular, n the local monopoly equlbrum, an expanded loyal segment allows a frm to obtan a greater demand wthout lowerng prce. And n the competton equlbrum, an expanded loyal segment dscourages a frm from competng for the reduced swtcher demand, whch allevates prce competton. 14

15 3.2 Scenaro O: Consumers derve a socal utlty from dentty suggeston In scenaro O, consumers assocatons wth a purchased product are publczed on socal meda, generatng a socal utlty from dentty suggeston Stage 2: Consumer Purchase Decson In the second stage of the game, a consumer makes her purchase decson not only based on products consumpton values, but on her expectaton on products socal values determned by her belef on other consumers purchase behavors. An equlbrum s acheved when each consumer s belef about other consumers purchase decsons are consstent wth these other consumers actual purchase behavors. We characterze the equlbrum demand n Lemma 2. Lemma 2. In scenaro O where consumers derve a socal utlty from dentty suggeston, n equlbrum, () a product s loyal segment never buys the other product; () nether product wll be sold to the swtcher segment alone; and () consumers from the same group always buy the same product. Proof. See Appendx. Followng Lemma 2, n equlbrum, the demand of group A consumers for the two products satsfy D A 1 {a, 0} and DA 2 D B 1 = 0 and DB 1 D N 1 {1 a b, 0} and DN 2 = 0. The demand of group B consumers for the two products satsfy {b, 0}. And the demand of group N consumers for the two products satsfy {1 a b, 0}. We now derve consumers utlty functons. Group A consumers never buy product 2 and ther utlty from buyng product 1 depends on whether group N consumers also buy, and can be derved as U1 A = q + M p 1 f D1 N = 0 (11) q + M b 1 b s p 1 f D1 N = 1 a b. Equaton (11) shows that when group N consumers also buy product 1, group A consumers suffer a socal loss of b 1 b s from the possblty of beng msdentfed as belongng to group N, wth b 1 b calculated as the proporton of segment N buyers among all product 1 buyers. 15

16 Smlarly, group B consumers never buy product 1 and ther utlty from buyng product 2 s U2 B = q + M p 2 f D2 N = 0 (12) q + M b s p 2 f D2 N = 1 a b. When group N consumers also buy product 2, group B consumers suffer a socal loss of b s, wth b calculated as the proporton of segment N buyers among all product 2 buyers. Group N consumers may buy ether product and they always buy a product wth the product s loyal segment. When group N consumers buy product 1, the probablty that they are msdentfed as belongng to group A s a 1 b, calculated as the proporton of segment A buyers among all product 1 buyers; and when group N consumers buy product 2, the probablty that they are msdentfed as belongng to group B can be calculated as from buyng products 1 and 2 as b. We thus obtan Group N consumers utltes U1 N = (1 r)q + M a 1 b s p 1 and (13) U2 N = (1 r)q + M b 1 a s p 2. (14) Lastly, when consumers do not buy any product, they derve zero consumpton utlty. Snce these consumers have no means to reveal ther denttes to the publc, they also derve zero socal utlty. We thus have U A 0 = U B 0 = U N 0 = 0. (15) pay. From equatons (11)-(15), we defne three mportant thresholds n consumers wllngness to Defnton 2. In scenaro O where consumers derve a socal utlty from dentty suggeston: () The hghest wllngness to pay of a product s loyal customers for the product s W O Loyal = q + M. (16) 16

17 () The swtchers hghest wllngness to pay for products 1 and 2 are respectvely WSwtch O1 = (1 r)q + M a s and 1 b (17) WSwtch O2 = (1 r)q + M b s. 1 a (18) Comparng (17) and (18), we obtan W O Swtch = W O1 Swtch W O2 Swtch (b a)(1 a b) = s > 0. (19) (1 a)(1 b) That s, swtchers n group N prefer product 1 wth a small loyal segment over product 2 wth a larger segment, although the two products offer the same consumpton value. Ths s because group N consumers, when buyng product 1, are less lkely to be msdentfed as belongng to product 1 s small loyal segment A than they are lkely to be msdentfed as belongng to product 2 s large loyal segment B when buyng product 2. Moreover, WSwtch O decreases wth a, ndcatng that a larger loyal segment of product 1 reduces the product s advantage n nducng demand from swtchers. Ths s because a larger loyal segment of product 1 makes group N consumers more lkely to be msdentfed when they buy the product. Furthermore, WSwtch O ncreases wth s, ndcatng that a greater socal loss from msdentfcaton ncreases product 1 s advantage n nducng demand from swtchers. Snce group N consumers have a hgher wllngness to pay for product 1 than for product 2, they wll buy product 1 even f ts prce s hgher than product 2 s prce, as long as the prce premum s not too large, p 1 p 2 < WSwtch O. Ths observaton suggests that frm 1 wth a small loyal segment enjoys an advantage n prce competton over ts rval frm 2. We focus on the case of p 1, p 2 W O Loyal products below: where demand can exst for both products and derve the demand for the two D O 1 = a, DO 2 = b f p 1 > W O1 Swtch &p 2 > W O2 Swtch D O 1 = a, DO 2 = 1 a f p 2 < p 1 W O Swtch &p 2 W O2 Swtch D O 1 = 1 b, DO 2 = b f p 2 p 1 W O Swtch &p 2 > W O2 Swtch. A proof of ths demand functon s provded n Appendx. (20) 17

18 3.2.2 Stage 1: Frm Prce Decson In the frst stage of the game, each frm sets ts product prce to maxmze ts total proft, π O = p D O ( = 1, 2). We summarze the two frms equlbrum prces and market payoffs n the followng Proposton. Proposton 1. In Scenaro O where consumers derve a socal utlty from dentty suggeston, n equlbrum: () (Local monopoly equlbrum) If the loyalty premum s large ( r r O = ( b)(q+m) as (1 b)q ), the two frms charge p O 1 = p O 2 = q + M and obtan equlbrum profts of π O 1 = (q + M)a and π O 2 = (q + M)b, respectvely. () (Dfferentaton equlbrum) If the loyalty premum s n the ntermedate range ( r O = ( b)(q+m) bs ()q r < r O ), the two frms charge p O 1 = (1 r)q + M a 1 bs and po 2 = q + M and obtan equlbrum profts of π O 1 = ((1 r)q + M a 1 bs)(1 b) and πo 2 = (q + M)b, respectvely. () (Competton equlbrum) If the loyalty premum s small ( r < r O ), the two frms randomze ther prces n a mxed-strategy equlbrum, and obtan equlbrum profts of π O 1 = (1 b)( b(q+m) () + (b a)(1 b a)s ()(1 b) ) and π O 2 = (q + M)b, respectvely. Furthermore, πo 1 a and πo 1 a < 0 f a < 1 Proof. See Appendx. > 0 n (), πo 1 a b(1 b)s(m+q+s) s < 0 n (); n (), πo 1 a ; πo 2 b > 0 f a > 1 > 0 n (), (), and (). b(1 b)s(m+q+s) s Smlar as n scenaro NO, the market equlbrum depends on the premum n loyal customers wllngness to pay for a product over swtchers and the dff erentaton equlbrum arses when such loyalty premum s n the ntermedate range (r O < r < r O ). Interestngly, the dfferentaton equlbrum s more lkely to arse n scenaro O than n scenaro NO, evdenced n that r O r O = (b a)( b) q+m+s ()(1 b) q > r NO r NO. Ths s because the socal utlty that consumers derve from dentty suggeston n scenaro O makes swtchers prefer product 1 over product 2, W O Swtch > 0, even f the two products offer the same consumpton utlty. Ths asymmetry n consumer preferences for the two products motvates the two frms to adopt dfferentated marketng strateges. We nvestgate how the socal gan parameter M and the socal loss parameter s affect frms equlbrum profts, and obtan the followng corollary. Corollary 1. In Scenaro O where consumers derve a socal utlty from dentty suggeston, 18

19 () When the socal gan M from dentfcaton ncreases, both frms obtan a greater proft across all equlbrum condtons; () When the socal loss s from msdentfcaton ncreases, the proft of frm 1 wth a small loyal segment does not change n the local monopoly equlbrum, decreases n the dff erentaton equlbrum, and ncreases n the competton equlbrum. Moreover, the proft of frm 2 wth a larger loyal segment does not change n any equlbrum condton. Proof. See Appendx. Corollary 1 hghlghts the strategc mpact of socal utlty on frm proft when consumers suggest denttes to the publc through product assocatons. There are three effects. Frst, when consumers publcze assocatons wth a branded product they purchase, they suggest ther group membershp to the publc and gan a value from dentty revelaton. Ths perceved socal gan ncreases consumers wllngness to pay for the product and allows the frm to charge a hgher prce for ts product. Ths dentfcaton effect s realzed through parameter M and has a postve mpact on frm proft. Ths effect s realzed for both frms across all three equlbrum condtons. Second, when consumers publcze assocatons wth a branded product, they are lkely to be msdentfed as belongng to a dfferent consumer group f the product s also purchased by consumers from that dfferent group. Ths possblty of msdentfcaton lowers consumers wllngness to pay for the product and forces a frm to lower ts product prce f t desres to sell to more than one consumer groups. Ths msdentfcaton eff ect s realzed through s and has a negatve mpact on the frm s proft. Moreover, ths msdentfcaton effect s more severe for frm 2 wth a larger loyal segment, snce the larger loyal segment ncreases the probablty of a swtcher beng msdentfed when she buys a product. Lastly, concerned by the potental socal loss from msdentfcaton, swtchers develop dfferent preferences for the two competng products that offer the same consumpton value but attract dfferent szes of loyal customers. The resultng preference asymmetry allevates prce competton. Ths competton allevaton eff ect s realzed through s and has a postve mpact on both frms proft when they compete to sell to the swtcher segment. Snce both the msdentfcaton effect and the competton allevaton effect are realzed through the socal loss parameter s, the mpact of s on frm proft depends on the relatve strengths of the two effects. In partcular, s has no mpact on ether frm n the local monopoly equlbrum where 19

20 both frms sell to ther loyal segments only. In the dff erentaton equlbrum, s only affects frm 1 through the negatve msdentfcaton eff ect and does not affect frm 2. In the competton equlbrum, s affects both frms through both effects. For frm 1 wth a small loyal segment, the msdentfcaton eff ect s small and domnated by the postve competton allevaton eff ect; and for frm 2 wth a larger loyal segment, the msdentfcaton effect s large and cancelled out by the competton allevaton eff ect. Moreover, Proposton 1 shows that an expanded loyal segment may hurt frm 1 s proft ( πo 1 a < 0) n the dff erentaton equlbrum or the competton equlbrum. Ths s because a larger loyal segment makes swtchers who buy product 1 more lkely to be msdentfed, whch exacerbates the negatve msdentfcaton eff ect on frm 1 s proft. We state ths result n the followng corollary. Corollary 2. Consumers dentty suggeston through publczng product assocatons dscourages frm 1 wth a small loyal segment from convertng swtchers to ts loyal customers, f r O r < r O, or f r > r O b(1 b)s(m+q+s) and a < 1 s. 3.3 Impact of Consumer Identty Suggeston on Frm Proft We compare the frms equlbrum payoffs n scenaro NO (Lemma 1) and scenaro O (Proposton 1) to obtan nsghts regardng how consumers dentty suggeston behavors of publczng product assocatons affect frms market performance. We summarze the result n the followng proposton. Proposton 2. Compared to scenaro NO wth no socal sharng, n scenaro O where consumers derve a socal utlty from dentty suggeston, () Frm 1 wth a small segment obtans a lower proft, π O 1 < π NO 1, f mn{b, (q s)(1 b) M+q, 1 2 (1 M+(1 2b) 2 q M+q )} and b + M q as (1 b)q parameter regon, frm 1 obtans a greater proft, π O 1 > π NO 1. M(1 b) s < a < < r < 1 a(m+q) (1 b)q ; beyond ths () Frm 2 wth a large loyal segment always obtan a greater proft, π O 2 > π NO 2. Proof. See Appendx. Proposton 2 shows that consumers socal sharng behavors of publczng product assocatons by generatng socal utlty from dentty suggeston always beneft frm 2 wth a large loyal segment, but can hurt frm 1 wth a small loyal segment. Ths result s mportant because t hghlghts the potental harm consumers socal sharng behavors may have on frm proft. partcular, frm 1 suffers a proft loss, when ts loyal segment s of ntermedate sze ( M(1 b) s 20 In

21 Fgure 2: The horzontal axs s a, the sze of frm 1 s loyal segment, whch ranges over [0,0.5]. The vertcal axs s r, the loyalty premum, whch ranges over [s/q,1]. The dark regon depcts the case when frm 1 wth a smaller loyal segment obtans a lower proft n scenaro O than n scenaro NO, π O 1 < π NO 1. Outsde ths regon, frm 1 obtans a greater proft n scenaro O than n scenaro NO, π O 1 > π NO 1. < a < mn{b, (q s)(1 b) M+q, 1 2 (1 M+(1 2b) 2 q M+q )}) and the loyalty premum n consumers wllngness to pay s of moderate magntude ( b + M q as (1 b)q < r < 1 a(m+q) (1 b)q ). In ths parameter regon, the sze of frm 1 s loyal segment a s not large enough to entce frm 1 to gve up the swtcher demand, nor s t small enough to lmt the negatve msdentfcaton effect that arses when frm 1 sells to the swtcher segment. Moreover, the loyal premum s not large enough to demotvate frm 1 from sellng to swtchers, nor s t small enough to nduce frm 2 to compete for swtchers so that frm 1 can beneft from the postve competton eff ect. Fgure 2 llustrates the parameter regon where π O 1 < π NO 1 at parameter values of M = 0.3, b = 0.4, s = 1, and q = 3. 21

22 4 Extenson: Identty Announcement on Socal Meda In the man model, we consder the case when consumers suggest ther denttes through publczng product assocatons. Now we consder n an extended model scenaro F, where consumers not only suggest ther denttes, but drectly announce ther denttes through publczng opnons on socal meda. The drect socal announcement allows consumers n group g (g = A, B, N) to obtan a socal utlty even f they do not buy any product, S F.g 0 = dm. (21) Parameter d (0 d 1) captures the effectveness of dentty announcement on socal meda n revealng one s true dentty. When drect dentty announcement s not effectve at all, d = 0, publczng opnons on socal meda does not help reveal a consumer s true dentty and S F.g 0 = 0; n ths case the model reduces to scenaro O. At the other extreme, when dentty announcement s fully effectve, d = 1, publczng opnons on socal meda perfectly reveals a consumer s true dentty and S F.g 0 = M; n ths case the model actually reduces to scenaro NO where consumers consder only products consumpton values n makng purchase decsons. The socal utlty that a group g (g = A, B, N) consumer obtans from buyng product ( = 1, 2) depends on whether dentty announcement through publczng opnons or dentty suggeston through publczng product assocatons s more effectve n revealng the consumer s true dentty. In partcular, we have S F.g = max{dm, S O.g } M f D g = 0 = S O.g = M D g s f D g D g +D g > 0 & d < 1 D g dm f D g > 0 & d 1 D g s (D g +D g ) M s (D g +D g ) M. (22) If only group g consumers buy product (D g = 0), dentty suggeston through publczng product assocatons perfectly reveals the consumer s true dentty, and consumers obtan a socal utlty of S F.g = M. On the other hand, f product s also bought by non-group g consumers (D g > 0), dentty announcement s more effectve n revealng a consumer s true dentty f d > 1 22

23 D g (D g +D g ) s M. Other specfcatons of the man model apply. In the next, we consder two nterestng scenaros. Frst, we consder scenaro F L where dentty announcement through publczng opnons on socal meda s not very effectve, d < d = 1 max{ b 1 b s M, b s M, b s M, a s 1 b M }; n ths case, SF.g (D g > 0) = S O.g. Ths case s lkely to capture the current market stuaton where dscoverng one s true dentty through socal lstenng nvolves large monetary and tme costs and s thus typcally neff cent and neffectve. We also consder scenaro F H where dentty announcement through publczng opnons s hghly effectve, d > d = 1 mn{ b 1 b s M, b s M, b s M, a s 1 b M }; n ths case, SF.g (D g > 0) = dm. Ths case may capture the possble future market stuaton where dscoverng one s true dentty through socal lstenng becomes hghly eff cent and effectve. 4.1 Scenaro FL: Identty announcement s not very effectve (d < d) In ths scenaro, dentty suggeston through publczng product assocatons s more effectve n revealng consumers true denttes, and S F.g (D g buyng products 1 or 2 are the same as defned n scenaro O, U F L.g > 0) = S O.g. As such, consumers utltes from = U O.g ( = 1, 2; g = A, B, N). Dfferent from scenaro O, when consumers do not buy any product, publczng opnons on socal meda stll allows consumers n group g (g = A, B, N) to derve a socal utlty from dentty announcement, that s, U F L.g 0 = dm. Compared to scenaro O, the postve utlty that consumers derve from no purchase n scenaro FL reduces ther product purchase ntentons. We defne three mportant thresholds n consumers wllngness to pay below. Defnton 3. In scenaro FL where dentty announcement s not very effectve ( d < d): () The hghest wllngness to pay of a product s loyal customers for the product s WLoyal F L = q + (1 d)m. (23) () The swtchers hghest wllngness to pay for products 1 and 2 are respectvely Swtch = (1 r)q + (1 d)m 1 a b s; and 1 b (24) Swtch = (1 r)q + (1 d)m 1 a b s. 1 a (25) W F L1 W F L2 Comparng defnton 3 wth defnton 2 n scenaro O, t s easy to see that W F L Loyal < W O Loyal, 23

24 WSwtch F L1 < W Swtch O1, and W F L2 Swtch < W Swtch O2. That s, dentty announcement reduces all consumers wllngness to pay for products. Moreover, WSwtch F L1 W F L2 Swtch = W Swtch O1 W O2 Swtch, that s, dentty announcement does not change swtchers relatve preference for the two competng products. We summarze the equlbrum strateges of the two frms n the followng Lemma. Lemma 3. In stuaton FL where dentty announcement s not very eff ectve ( d < d), n equlbrum: () (Local monopoly equlbrum) If the loyalty premum s large ( r r F L = ( b)(q+(1 d)m) as (1 b)q ), the two frms charge p F L 1 = p F L 2 = q + (1 d)m and obtan equlbrum profts of π F L 1 = (q + (1 d)m)a and π F L 2 = (q + (1 d)m)b respectvely. () (Dfferentaton equlbrum) If the loyalty premum s n the ntermedate range ( r F L = ( b)(q+(1 d)m) bs ()q r < r F L ), the two frms charge p F 1 L = ((1 r)q + (1 d)m a 1 bs) and p F 2 L = (q + (1 d)m) and obtan equlbrum profts of π F 1 L = ((1 r)q + (1 d)m a 1 bs)(1 b) and π F L 2 = (q + (1 d)m)b respectvely. () (Competton equlbrum) If the loyalty premum s small, r < r F L, the two frms randomze ther prces n a mxed-strategy equlbrum, and obtan equlbrum profts of π F L 1 = (1 b)( b(q+(1 d)m) () Proof. See Appendx. + (b a)(1 b a)s ()(1 b) ) and π F 2 L = (q + (1 d)m)b respectvely. Note that the equlbrum condtons specfed n Lemma 3 can be obtaned by smply replacng M wth (1 d)m n Proposton 1 n scenaro O. Compared to scenaro O where consumers only publcze product assocatons to suggest dentty, n scenaro FL, consumers dentty announcement through publczng opnons reduces the dentfcaton eff ect of dentty suggeston, whch s realzed through the socal gan parameter M. Nonetheless, dentty announcement does not affect the msdentfcaton eff ect and the competton allevaton eff ect of dentty suggeston, whch are realzed through the socal loss parameter s. The allevated dentfcaton eff ect reduces the equlbrum profts of both frms; moreover, when dentty announcement becomes more effectve, the dentfcaton eff ect s reduced even further, causng a greater proft loss for both frms, that s, π F L 1 d < 0 and πf L 2 d < 0. Comparng the frms equlbrum payoffs n Scenaro FL (Lemma 3) and scenaro NO (Lemma 1), we obtan that consumers dentty suggeston and not-so-effectve dentty announcement on socal meda always make frm 2 wth a larger loyal segment enjoy a proft gan, π F L 2 > π NO 2. Such so- 24

25 cal sharng actvtes, however, cause frm 1 wth a small loyal segment to suffer a proft loss, π F L 1 < π NO (1 d)m+(1 2b) 2 q (1 d)m+q 1, f frm 1 s loyal segment has an ntermedate sze ( (1 d)m(1 b) )}) and the loyalty premum s moderate ( b s < a < mn{b, (q s)(1 b) q+(1 d)m, 1 2 (1 + (1 d)m q as (1 b)q < r < 1 a(q+(1 d)m) (1 b)q ). These results confrm our fndng n the man model (Proposton 2). Furthermore, when dentty announcement becomes more effectve (d s larger), the postve dentfcaton eff ect of dentty suggeston s reduced, and the parameter regon where frm 1 s worse off becomes larger. We summarze ths dscusson n the the followng proposton. Proposton 3. Compared to scenaro NO wth no socal sharng, consumers socal sharng behavors n stuaton FL where dentty announcement s not very effectve ( d < d) can cause a proft loss to frm 1 wth a small loyal segment. And such a proft loss s more lkely to occur when the eff ectveness of dentty announcement ncreases but remans low. Moreover, consumers socal sharng behavors n stuaton FL always make frm 2 wth a large loyal segment obtan a greater proft. Proof. See Appendx. 4.2 Scenaro FH: Identty announcement s hghly effectve (d > d) In ths scenaro, consumers dentty announcement through publczng opnons on socal meda s more effectve n revealng ther true denttes and S F.g (D g > 0) = dm. Group A consumers never buy product 2 and ther utlty from buy product 1 can be derved as U1 A q + M p 1 f D1 N = = 0. (26) q + dm p 1 f D1 N = 1 a b. Group B consumers never buy product 1 and ther utlty from buyng product 2 s U2 B q + M p 2 f D2 N = = 0. (27) q + dm p 2 f D2 N = 1 a b. Group N consumers may buy ether products 1 or 2 and ther utltes from buyng the two products are respectvely U N 1 = (1 r)q + dm p 1, and (28) U N 2 = (1 r)q + dm p 2. (29) 25