Sharing the wealth: When should firms treat customers as partners?

Eric T. Anderson*

*Corresponding author for this work

Research output: Contribution to journalArticle

20 Scopus citations

Abstract

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 that in a duopoly 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.

Original languageEnglish (US)
Pages (from-to)955-971
Number of pages17
JournalManagement Science
Volume48
Issue number8
DOIs
StatePublished - Aug 2002

Keywords

  • Coase Theorem
  • Contracting
  • Customer Relationship Management
  • Efficiency
  • Pareto-Efficiency
  • Partnering

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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