Brand familiarity and product knowledge in customization
AbstractThis paper challenges the assumption commonly used in the theoretical literature on customization that consumers always get their ideal varieties when they purchase a customized product. I adopt Hotelling's horizontal diffierentiation model with two firms competing for a continuum of consumers. Each consumer has a most preferred variety and possesses a certain level of category-specific knowledge. Initially, the firms produce standard products located at the end points of the variety interval. Suppose one of the firms offers customization. Consumers familiar with the brand can easily transfer their needs into appropriate characteristics of this brand. Consumers unfamiliar with the brand have difficulty in expressing their preferences. Category-specific knowledge is crucial here. Knowledgeable consumers are more capable of analyzing information than less knowledgeable ones, and the products they design better match their preferences. The game runs as follows. First, the firms simultaneously decide whether to offer customization, then engage in price competition. I show that while customization makes the products less differentiated, the frictions introduced into consumer co-design activities relax price competition. As a result, customization by one of the firms occurs in equilibrium.
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Bibliographic InfoArticle provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.
Volume (Year): 6 (2010)
Issue (Month): 3 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1742-7355
Other versions of this item:
- Oksana Loginova, 2009. "Brand Familiarity and Product Knowledge in Customization," Working Papers 0905, Department of Economics, University of Missouri.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
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- Oksana Loginova & X. Hnery Wang, 2013. "Customization in an Endogenous-Timing Game with Vertical Differentiation," Working Papers 1304, Department of Economics, University of Missouri.
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