Democracy in Product Design: Consumer Participation and Differentiation Strategies

Abstract

An increasing number of firms use social media to allow their customers to vote on new product design. This paper studies the implications of employing such a democratic product design (DPD). A linear city model is used with random locations to capture uncertainty about consumer preferences and to study strategic forces in monopoly and duopoly settings. The results indicate that a monopolist will use market research to resolve the demand uncertainty, unless DPD provides a cost advantage. In duopoly, an asymmetric equilibrium emerges with exactly only one firm using DPD. Commitment to following consumer votes proves to be a strategic advantage, therefore at least one firm promises not to deviate from the product design consumers voted for. One firm would even self-impose a penalty in order to prevent future deviations. Firm profits are generally hurt by the use of DPD. The role of strategic consumer participation in voting is also explored. The results show that a monopolist prefers an intermediate level of participation cost to ensure an optimal product. In contrast, duopolists are best off when participation costs are very low or very high, because this allows them to avoid using DPD.

Keywords: Consumer participation, product design, uncertainty

JEL Classification: D72, L11, M31