Overcoming Product Cannibalization

We develop a model of separating equilibrium where a monopolist markets a physical product to two types of consumers in the online channel. We show how the seller may use personalization technology to limit or even eliminate the distortion caused by the cannibalization problem. This results in higher product quality levels and earlier product introductions for goods aimed at low type consumers. We find that personalization technology also lessens the adverse effects caused when the seller cannot credibly commit to future actions. We show that the seller should focus all of its personalization efforts on high type consumers, and must concern itself with the level of patience of high type consumers and not low types. We also examine three different seller strategies for bundling the sale of the physical good with customer access to a seller-sponsored online community. When personalization capabilities are relatively low, the seller should segment consumers into two communities by allowing consumers to have access to the community associated with the type of physical good that was actually purchased. When personalization capabilities are sufficiently high, the seller should switch from the segmented communities strategy and merge all consumers into one community to take advantage of externality effects.