Stimulating Early Adoption of New Products through Channel Disintegration

Abstract

Conventional wisdom holds that adding layers to a distribution channel is detrimental to the interests of consumers and the channel that serves them. In contrast, our study indicates that a disintegrated channel structure can be desirable in some instances. When consumers have valuation uncertainty prior to consuming a product, having an independent retailer may boost both channel profits and consumer surplus relative to direct selling by an integrated firm. The quandary in selling such products is that after early adopters make their purchase decisions, the seller may alter prices in such a way that makes early adopters' decisions appear suboptimal in hindsight. Since the seller cannot credibly commit to future prices, customers are reluctant to adopt early, choosing instead to delay their purchase decisions. This delay is certainly detrimental to the interest of the distribution channel, but the rejection of the early adoption discount can equally reduce consumer surplus. This problem can be mitigated by introducing an independent retailer. The familiar double marginalization “problem” from channel disintegration can credibly assure customers of unfavorable future prices for late adoption. This assurance attracts more customers to seek early adoption, leading to lower overall retail prices, increased supply, and higher consumer and producer surpluses.

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