How consumer valuation heterogeneity impacts firms' profit: Peer influence makes a difference

Abstract Consumers often have heterogeneous valuations for a product. However, no study has analyzed how this heterogeneity impacts firms’ profit, particularly when consumers’ purchase decisions depend on not only their own valuation but also their peers’ product choices. This study fills that gap by theoretically examining the role of consumer valuation heterogeneity in a firm’s profit. We demonstrate that when there is no peer influence among consumers, a firm’s profit decreases when consumers are more variant in their product valuations. However, when peer influence is strong, a certain level of valuation heterogeneity can increase the firm’s profit. This is because valuation heterogeneity gives the firm an opportunity to charge a higher price when it can rely consumers who highly value the product to influence the remaining consumers’ purchase intention. Although this higher price will initially result in a lower adoption rate, the firm will eventually achieve a higher profit with intense peer influence.