When to take or forgo new product exclusivity: Balancing protection from competition against word-of-mouth spillover

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.