Value Co-Creation or Value Co-Destruction: A Pricing Mechanism Perspective

Value co-creation practices, such as online self-service, are increasingly adopted by firms to enhance customers engagement. However, these practices often devolve into value co-destruction due to the misuse of resources by participants. This paper argues that the traditional pricing mechanism—an institutional factor in market transactions—serves as a significant barrier to value co-creation. To substantiate this claim, this paper develops a principal-agent model to portray the dynamic process of value co-creation between a firm and a customer. Within this model, production costs are treated as decision variables for both the firm and the customer, while pricing is modeled as a decision variable for the firm. This framework allows for a systematic study of the impact of pricing decisions on value co-creation outcomes. The analysis reveals several key insights: For value co-creation, the optimal production costs of the firm and the customer must adhere to a specific ratio; Firms can influence input-output elasticity by strategically adjusting their value propositions; The optimal price should equitably allocate the surplus value between the firm and the customer; Achieving the optimal price is difficult under conditions of incomplete information or bounded rationality.