The Incentive to Join in Customer-to-Manufacturer (C2M) Mode: Competition and Quality Differentiation

Abstract

Customer-to-Manufacturer (C2M) is an emerging business mode in which the platform analyzes customers’ information and provides suggestions to manufacturers so that the manufacturers can understand customers’ needs much better. This paper investigates C2M by considering two competing firms that sell products to customers through an e-commerce platform. One produces high-quality products (firm H), and the other produces low-quality products (firm L). The platform sells a product improvement report to the firms, each firm decides whether or not to buy the report and join in C2M mode. The study results show that buying the product improvement report gives each firm the privilege of setting a higher product price. However, such privileges are weakened when both firms buy the reports. When the report price is small, the Nash equilibrium solution is that both firms buy the product improvement report, although it is not individually optimal for each firm. It indicates that the report price influences the firms’ profits and incentive to engage in C2M mode and one firm’s purchasing decision affects the other. Interestingly, we find that a moderate report price may make firm H worse off but benefit firm L. It indicates that the C2M mode is not always appealing to firms.