Price and Quality Strategy Considering the Adoption of Blockchain: Traceability Effect vs. Spillover Effect

Source abstract

In this paper, we examine how blockchain adoption affects leading firms. On the one hand, the traceability effect enabled by blockchain helps leading firms attract more customers from lagging firms by signaling product quality. On the other hand, blockchain adoption may also generate a spillover effect, leading to the diffusion of valuable knowledge to laggards. To capture this trade-off between the traceability and spillover effects, we develop a Stackelberg model of price and quality competition between a leading firm and a lagging firm. Our analysis yields several interesting findings. First, the two firms’ price and quality decisions depend on which effect dominates. When the traceability effect dominates, a Matthew effect emerges: the leading firm offers higher quality at a higher price, while the lagging firm does the opposite. When the two effects are roughly equal, both firms overinvest in quality, resulting in more intense competition. Second, blockchain adoption never leads to a win–win outcome for the two firms. We also characterize the conditions under which the leading firm should adopt blockchain. Third, both industry-wide profit and consumer surplus improve when the traceability effect is sufficiently strong. Our results provide guidance for firms, particularly market leaders, on whether and when to adopt blockchain technology.