Sharing the Wealth: When Should Firms Treat Customers as Partners?, Management Science
Marketers often stress the importance of treating customers as partners. A fundamental premise of this perspective is that all parties can be weakly better off if they work together to increase joint surplus and reach pareto efficient agreements. For marketing managers, this implies organizing marketing activities in a manner that maximizes total surplus. This logic is theoretically sound when agreements between partners are limitless and costless. In most consumer marketing contexts (business-to-consumer), this is typically not true. The question I ask is should one still expect firms to partner with consumers and reach pareto efficient agreements? In this paper, I use the example of a firm's choice of product configuration to demonstrate two effects. First, I show that a firm may configure a product in a manner that reduces total surplus but increases firm profits. Second, one might conjecture that increased competition would eliminate this effect, but I show in a duopoly that firm profits may be increasing in the cost of product completion. This second result suggests that firms may prefer to remain inefficient and/or stifle innovations. Both results violate a fundamental premise of partnering - that firms and consumers should work together to increase total surplus and reach pareto efficient agreements. The model illustrates that pareto efficient agreements are less likely to occur if negotiation with individual partners is infeasible or costly, such as in business to consumer contexts. Consumer marketers in one-to-many marketing environments should be wary of treating customers as partners because pareto efficient agreements may not be optimal for their firm.
Anderson, T. Eric. 2002. Sharing the Wealth: When Should Firms Treat Customers as Partners?. Management Science. 48(8): 955-971.