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Author:

• Mr. Wei ZHANG
  PhD Candidate in Decisions, Operations and Technology Management
  Anderson School of Management
  University of California

Abstract

Influencing the pace of adoption is important for a seller that introduces a new, short-life-cycle technology in B2B markets. If buyers adopt too early, they face great demand uncertainty in B2C markets; if they adopt too late, they miss early sales. In either situation, buyers will pass on some of the costs through negotiations, resulting in less-than-optimal benefits to the seller. However, influencing the pace of adoption is difficult for a seller because buyer decisions are correlated by externalities such as seller's cost learning and network effect among the buyers, which cause adoption rush or delay. Besides, in many B2B markets sellers cannot dictate the price over time to control adoption. We propose that sellers can influence and optimize buyer behavior through the structure of contract—i.e., fixed- or renegotiable-price—and we support this by conducting both a causal analysis using data from the semiconductor industry and a theoretical analysis using a game-theoretic model. We find that fixed-price contracts lead to faster adoption in the microprocessor market. However, price flexibility in general can affect the pace of adoption in different ways, and the optimal contract choice depends on the strength of externality, strength of competition, bargaining power, and the number of buyers.