Competitive Effects of Mass Customization
AbstractThe existing theoretical literature on mass customization maintains that customization reduces product differentiation and intensifies price competition. In contrast, operations management studies argue that customization serves primarily to differentiate a company from its competitors. Interactive involvement of the customer in product design creates an affective relationship with the firm, relaxing price competition. This paper provides a model that incorporates consumer involvement to explain the phenomena described in the operations management literature.Two firms on the Hotelling line compete for a continuum of consumers with heterogeneous brand preferences. An exogenously given fraction of consumers is potentially interested in customization. Consumer benefits from customization are the rewards from a special shopping experience and the value of product customization (a better fitting product); these benefits are higher for consumers located closer to the customizing brand. When a consumer purchases a customized product, he/she incurs waiting costs. Each firm simultaneously decides whether to offer standard products, customized products, or both, and then engage in price competition. I show that customization increases product differentiation, leading to less intense price competition. Depending on the parameter values, in equilibrium either both firms offer customized products, one firm offers customized products and the other standard and customized products, or one firm offers customized products and the other standard products. I perform comparative statics analysis with respect to the fraction of consumers interested in customization, the waiting costs, and the fixed cost of customization.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by De Gruyter in its journal Review of Marketing Science.
Volume (Year): 10 (2012)
Issue (Month): 1 (October)
Contact details of provider:
Web page: http://www.degruyter.com
Other versions of this item:
- 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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nan Xia & S. Rajagopalan, 2009. "Standard vs. Custom Products: Variety, Lead Time, and Price Competition," Marketing Science, INFORMS, vol. 28(5), pages 887-900, 09-10.
- Victor Tremblay & Stephen Polasky, 2002. "Advertising with Subjective Horizontal and Vertical Product Differentiation," Review of Industrial Organization, Springer, vol. 20(3), pages 253-265, May.
- Grewal, Dhruv & Iyer, Gopalkrishnan R. & Krishnan, R. & Sharma, Arun, 2003. "The Internet and the price-value-loyalty chain," Journal of Business Research, Elsevier, vol. 56(5), pages 391-398, May.
- Niladri B. Syam & Ranran Ruan & James D. Hess, 2005. "Customized Products: A Competitive Analysis," Marketing Science, INFORMS, vol. 24(4), pages 569-584, February.
- Justin P. Johnson & David P. Myatt, 2006.
"On the Simple Economics of Advertising, Marketing, and Product Design,"
American Economic Review,
American Economic Association, vol. 96(3), pages 756-784, June.
- David P. Myatt & Justin P. Johnson, 2004. "On the Simple Economics of Advertising, Marketing, and Product Design," Economics Series Working Papers 185, University of Oxford, Department of Economics.
- J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
- Haim Mendelson & Ali K. Parlaktürk, 2008. "Competitive Customization," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 377-390, October.
- Meurer, Michael & Stahl, Dale II, 1994. "Informative advertising and product match," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 1-19, March.
- Niladri B. Syam & Nanda Kumar, 2006. "On Customized Goods, Standard Goods, and Competition," Marketing Science, INFORMS, vol. 25(5), pages 525-537, September.
- Bloch, Francis & Manceau, Delphine, 1999. "Persuasive advertising in Hotelling's model of product differentiation," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 557-574, May.
- Von der Fehr, N.H.M. & Stevik, K., 1996.
"Persuasive Advertising and Product Differentiation,"
01/1996, Oslo University, Department of Economics.
- Nils-Henrik M. von der Fehr & Kristin Stevik, 1998. "Persuasive Advertising and Product Differentiation," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 113-126, July.
- Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
- Neeraj Arora & Xavier Dreze & Anindya Ghose & James Hess & Raghuram Iyengar & Bing Jing & Yogesh Joshi & V. Kumar & Nicholas Lurie & Scott Neslin & S. Sajeesh & Meng Su & Niladri Syam & Jacquelyn Thom, 2008. "Putting one-to-one marketing to work: Personalization, customization, and choice," Marketing Letters, Springer, vol. 19(3), pages 305-321, December.
- Rajiv Dewan & Bing Jing & Abraham Seidmann, 2003. "Product Customization and Price Competition on the Internet," Management Science, INFORMS, vol. 49(8), pages 1055-1070, August.
- Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
- Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.