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Co-Creation with Production Externalities

Author

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  • Niladri B. Syam

    (Department of Marketing, C. T. Bauer College of Business, University of Houston, Houston, Texas 77204)

  • Amit Pazgal

    (Department of Marketing, Jones Graduate School of Business, Rice University, Houston, Texas 77005)

Abstract

Co-creation, the participation of customers in the design and production of goods and services, has been gaining popularity in recent years. In this research we incorporate firm pricing into the joint production process allowing us to study (1) production externalities between firm and customers, (2) production externalities among customers, and (3) optimal pricing by firms.We show that given a choice, a monopoly firm will opt for co-creation with customers rather than deal with passive price-taking consumers. Furthermore, the firm will increase the effort it devotes to co-creation as the number of potential co-creating customers increases.We show that the profit of a firm facing a centralized pattern of externalities among customers (with an expert, or lead user, in the center) can be higher than its profit when facing a decentralized pattern of externalities among customers and clearly dominates its profit when customers do not have any cross externalities. Thus, we provide a different justification for the use of lead users, one that depends on their network centrality and not on having lower cost, more information, or greater ability than the firm. Because the decentralized pattern has more links than the centralized pattern, our results demonstrate the importance of the pattern of links between customers, and not just their number, in determining the profitability of co-creation.Furthermore, we find that the lead user's externality spillover to other connected users, her neighbors, acts as a force multiplier on the efforts exerted by all participants in equilibrium. Specifically, a higher spillover from the lead user increases the efforts of the firm, the neighbors, and the lead user herself, and this may lead to beneficial outcomes for all.Finally, we show that in co-creation environments, a monopolist firm may benefit by committing to a single price rather than exercising price discrimination. This is because the pricing structure affects customers' incentive to invest effort in the innovation-production stage.

Suggested Citation

  • Niladri B. Syam & Amit Pazgal, 2013. "Co-Creation with Production Externalities," Marketing Science, INFORMS, vol. 32(5), pages 805-820, September.
    • Handle: RePEc:inm:ormksc:v:32:y:2013:i:5:p:805-820
    DOI: 10.1287/mksc.2013.0791
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    References listed on IDEAS

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    Cited by:

    1. Adamik Anna & Nowicki Michał & Szymańska Katarzyna, 2018. "Openness to co-creation as a method of reducing the complexity of the environment and dynamizing companies’ competitive advantages," Management & Marketing, Sciendo, vol. 13(2), pages 880-896, June.
    2. Stuart Read & Stefan Michel & Jan H. Schumann & Kumar Rakesh Ranjan, 2019. "Pricing co-created value: an integrative framework and research agenda," AMS Review, Springer;Academy of Marketing Science, vol. 9(3), pages 155-183, December.
    3. Ramaswamy, Venkat & Ozcan, Kerimcan, 2018. "What is co-creation? An interactional creation framework and its implications for value creation," Journal of Business Research, Elsevier, vol. 84(C), pages 196-205.
    4. Van den Broeke, Maud & Paparoidamis, Nicholas, 2021. "Engaging in or escaping co-creation? An analytical model," International Journal of Production Economics, Elsevier, vol. 231(C).
    5. Zhang, Xiaojing & Zhang, Yulin, 2024. "Content marketing in the social media platform: Examining the effect of content creation modes on the payoff of participants," Journal of Retailing and Consumer Services, Elsevier, vol. 77(C).
    6. Guo, Shu & Choi, Tsan-Ming & Chung, Sai-Ho, 2022. "Self-design fun: Should 3D printing be employed in mass customization operations?," European Journal of Operational Research, Elsevier, vol. 299(3), pages 883-897.
    7. Yang, Rui & Tang, Wansheng & Dou, Mengdi & Zhang, Jianxiong, 2021. "Pricing and investing in co-creation with customers for a duopoly," International Journal of Production Economics, Elsevier, vol. 237(C).
    8. Amit Basu & Sreekumar Bhaskaran, 2018. "An Economic Analysis of Customer Co-design," Information Systems Research, INFORMS, vol. 29(4), pages 787-804, December.
    9. Oksana Loginova & Niladri B. Syam, 2020. "Sourcing Co-Created Products: Should Your Suppliers Collaborate on Cost Reductions?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(2), pages 329-355, March.
    10. Dinah Cohen-Vernik & Oksana Loginova & Niladri B. Syam, 2016. "Sourcing Co-Created Products: Should your Suppliers Collaborate?," Working Papers 1618, Department of Economics, University of Missouri, revised 14 Aug 2018.
    11. Jost, Peter-J. & Süsser, Theresa, 2020. "Company-customer interaction in mass customization," International Journal of Production Economics, Elsevier, vol. 220(C).
    12. Anna Adamik & Michał Nowicki, 2019. "Pathologies and Paradoxes of Co-Creation: A Contribution to the Discussion about Corporate Social Responsibility in Building a Competitive Advantage in the Age of Industry 4.0," Sustainability, MDPI, vol. 11(18), pages 1-38, September.
    13. Marlen Gabriele Arnold, 2017. "Inklusive Wertschöpfung auf BOP Märkten [Inclusive value creation in BOP markets]," Sustainability Nexus Forum, Springer, vol. 25(1), pages 25-32, June.
    14. Cohen-Vernik, Dinah & Pazgal, Amit & Syam, Niladri B., 2019. "Competing with co-created products," International Journal of Research in Marketing, Elsevier, vol. 36(1), pages 63-82.
    15. Elisa Martina Martinelli & Maria Cristina Farioli & Annalisa Tunisini, 2021. "New companies’ DNA: the heritage of the past industrial revolutions in digital transformation," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(4), pages 1079-1106, December.
    16. Alfonso Gambardella & Christina Raasch & Eric von Hippel, 2017. "The User Innovation Paradigm: Impacts on Markets and Welfare," Management Science, INFORMS, vol. 63(5), pages 1450-1468, May.

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