Manufacturers or resellers introducing a new product often must decide
whether and for how long to be its exclusive seller. Standard models of
competition and conventional wisdom suggest that exclusivity boosts
profits. However, using both agent-based simulations and game-theoretic
modeling, the authors find that positive word of mouth (WOM) from
customers of rival firms can make exclusivity unprofitable. This
reversal of conventional wisdom occurs because WOM creates a positive
externality, and a firm holding exclusivity cannot benefit from the WOM
spillover generated by customers of other firms. The benefits of
forgoing exclusivity are magnified by (1) the presence of locked-in
customers who consider buying from only a single firm, (2) the extent to
which opinion leaders are among a firm's own locked-in customers rather
than those of competitors, and (3) customers' low price sensitivity. In
addition, firms sometimes benefit from forgoing exclusivity even
without WOM from rivals' customers, but only when the combination of
large-scale lock-in, high price sensitivity, and strong WOM among the
firm's customers exists. [ABSTRACT FROM AUTHOR]