Effect of online personalization services on complementary firms

Should complementary firms offer online personalization services to their customers, and how does the differentiated quality of personalization services affect product prices and profits? To answer these questions, we investigate a two-dimensional model of both vertically differentiated product preferences and horizontally differentiated personalization services. The asymmetric quality of basic and complementary personalization services offered by firms is examined in three cases. The quality asymmetry of basic and complementary personalization services, and the complementarity of products lead to several interesting findings regarding firms' prices and profits. We find that when differentiated personalization services are offered by firms, the profits for both firms increase in complementarity. Given the presence of complementary personalization services offered by firm 1, both firms are worse off with the quality of complementary personalization services. When quality asymmetry exists for both basic and complementary personalization services, there are win-lose, win-win, and lose-win scenarios, which depend on the level of quality differentiation in the basic personalization services offered by firm 2. Furthermore, by comparing the profits in three cases, we find that firms' profits rest in complementarity.