The value of Augmented Reality on platform-based supply chains: Impact of Accuracy Effect and Entertainment Effect

Abstract

Augmented Reality (AR) has been increasingly applied in e-commerce to facilitate consumer purchasing. This paper characterizes and models two features of AR: the Accuracy Effect and Entertainment Effect. The former refers to AR mitigating consumer valuation bias, while the latter refers to the psychological entertainment consumers obtain when using AR to facilitate their purchasing. Although AR mitigates consumer valuation bias (Accuracy Effect), AR may also reduce the consumers’ prior valuation of products. In addition, despite AR increasing the consumers’ willingness to pay (through the Entertainment Effect), it exacerbates the bias between the products’ true value and the value perceived by consumers. This research investigates the question that whether the platform should adopt AR, and clarifies AR’s value to the platform, consumers, and integrated supply chain. First, we find that AR does not necessarily benefit the platform, while it can favor the platform only if the Accuracy Effect is large and the Entertainment Effect is small. Second, a large Entertainment Effect always hurts consumers. However, the impact of the Accuracy Effect on consumers is ambiguous and differentiated by a threshold influenced by the Entertainment Effect, where a larger Entertainment Effect narrows the range in which the Accuracy Effect favors consumers. Third, the integrated supply chain performance can be enhanced by adopting AR because the manufacturer can benefit from a larger Entertainment Effect while the platform can be more profitable with a larger Accuracy Effect. In extensions, we particularly find that product publicity can make AR more likely to favor the platform only when the publicity effectiveness reaches a certain level, and consumer return cost can be a driving force for the platform to adopt AR.