The introduction of product upgrades in a competitive environment is commonly observed in the software industry. When introducing a new product, a software vendor may employ behavior-based price discrimination (BBPD) by offering a discount over its market price to entice existing customers of the competitor. This type of pricing is referred to as competitive upgrade discount pricing and is possible because the vendor can use proof of purchase of a competitor's product as credible evidence to offer the discount. At the same time, the competitor may offer a discount to its own previous customers in order to induce them to buy its upgrade. We formulate a game-theoretic model involving an incumbent and entrant where both firms can offer discounts to existing customers of the incumbent. Although several equilibrium possibilities exist, we establish that an equilibrium with competitive upgrade discount pricing is observed only for a unique market structure and a corresponding unique set of prices. In this equilibrium, instead of leveraging its first mover advantage, the incumbent cedes market share to the entrant. Furthermore, the profits of both the incumbent and the entrant reduce with switching costs. This implies that the use of BBPD has product design implications because firms may influence the switching costs between their products by making appropriate compatibility decisions. In addition, lower switching costs result in reduced consumer surplus. Hence, a social planner may want to increase switching costs. The resulting policy implications are different from those prevalent in other industries such as mobile telecommunications where the regulators reduced switching costs by enforcing number portability.
Consumer-generated media, particularly blogs, can help companies increase the visibility of their products without spending millions of dollars in advertising. Although a number of companies realize the potential of blogs and encourage their employees to blog, a good chunk of them are skeptical about losing control over this new media. Companies fear that employees may write negative things about them and that this may bring significant reputation loss. Overall, companies show mixed response toward negative posts on employee blogs- some companies show complete aversion; others allow some negative posts. Such mixed reactions toward negative posts motivated us to probe for any positive aspects of negative posts. In particular, we investigate the relationship between negative posts and readership of an employee blog. In contrast to the popular perception, our results reveal a potential positive aspect of negative posts. Our analysis suggests that negative posts act as catalyst and can exponentially increase the readership of employee blogs, suggesting that companies should permit employees to make negative posts. Because employees typically write few negative posts and largely write positive posts, the increase in readership of employee blogs generally should be enough to offset the negative effect of few negative posts. Therefore, not restraining negative posts to increase readership should be a good strategy. This raises a logical question: what should a firm's policy be regarding employee blogging? For exposition, we suggest an analytical framework using our empirical model
We study how interorganizational systems (IOS) such as electronic markets and other enabling information technologies that facilitate broader interfirm transactions affect the extent of outsourcing in firms. We do so by modeling firms in a three-tier value chain consisting of buyers, intermediaries, and suppliers, who can interact using IOS that lower the procurement search costs associated with finding appropriate trading partners. In the context of complex business-to-business (B2B) search, we study how decreasing search costs affect a firm's decision to insource or outsource the procurement function, depending on whether the search process is information intensive or communication intensive. Variation in search costs changes the transaction costs of interaction between firms, as well as the contracting costs associated with outsourcing, owing to changes in the costs of moral hazard for delegated search. We study these effects in a new model that integrates search theory into the principal-agent framework, and establish that the optimal outsourcing contract has a simple "all or nothing" performance-based structure under fairly general assumptions. Our model predicts that when B2B search is information intensive, IOS will facilitate an increase in outsourcing, market-based transactions, and a reduction in the vertical scope of extended enterprises. In contrast, when B2B search is primarily communication intensive, IOS will lead to tighter integration and an increase in the vertical scope of the extended enterprise. Our research suggests that the nature of the information technologies and of the business activities supported by IOS are crucial determinants of the organizational and industry changes they induce, and our results have important implications for a variety of industries in which both technological and agency issues will influence the eventual success of global IT-facilitated extended enterprise initiatives.