Co-creation in a duopoly considering the effect of product return

Abstract

Co-creation has become popular in experience good markets as it can resolve the uncertainty of the mismatch between product attributes and customer preferences. This paper delves into an examination of how firms strategize product co-creation with their customers in a competitive duopoly context, all the while taking into account the potential product return stemming from mismatch uncertainty. Results show that when the launching cost is moderate and the customer’s participation cost is relatively small, an asymmetric equilibrium with one firm launching the project and the other not is reached; otherwise, both firms adopt co-creation or not, conditional on the launching cost. Besides, firms may fall into a prisoner’s dilemma in which both firms launch the project when the launching cost is moderate. Furthermore, it is shown that co-creation functions as an effective way for firms to escape the Bertrand trap and reap the benefits of the product’s high valuation. Additionally, there is a mutual influence between co-creation and product return. A higher product return cost incentivizes firms to embrace co-creation, but meanwhile, it makes them more susceptible to falling into a prisoner’s dilemma scenario. In a state of equilibrium, co-creation consistently diminishes the product return for the firm engaging in it. Particularly, the firm not providing co-creation can take a free ride on the competitor’s co-creation benefits in reducing product return when the return cost is relatively large. Lastly, the value of co-creation can be amplified through the implementation of a price discrimination strategy, particularly when the participation cost is relatively large.