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Customized Products: A Competitive Analysis

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Author Info

  • Niladri B. Syam

    ()
    (Department of Marketing, C. T. Bauer College of Business, University of Houston, 4800 Calhoun Road, Houston, Texas 77204)

  • Ranran Ruan

    ()
    (Department of Marketing, C. T. Bauer College of Business, University of Houston, 4800 Calhoun Road, Houston, Texas 77204)

  • James D. Hess

    ()
    (Department of Marketing, C. T. Bauer College of Business, University of Houston, 4800 Calhoun Road, Houston, Texas 77204)

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    Abstract

    This paper investigates the competitive market for mass-customized products. Competition leads to surprising conclusions: Manufacturers customize only one of a product's two attributes, and each manufacturer chooses the same attribute. Customization of both attributes cannot persist in an equilibrium where firms first choose customization and then choose price, because effort to capture market with customization makes a rival desperate, putting downward pressure on prices. Equilibrium involves partial or no customization. In partial customization, rival firms do not differentiate their mass-customization programs: If firms customize different attributes, many more consumers are indifferent between the two firms. The elasticity of demand is increased and the resulting price war makes differentiated customization unprofitable. If firms customize the same attribute of a two-attribute product, they should concentrate on the attribute with the smaller heterogeneity in consumers' preferences. We incorporate consumers’ effort in portraying their preferences as a cost of interaction and provide public policy findings on the well-being of these consumers: When this cost is low, consumers are better off with customization than with standard goods, but firms choose too little customization. The loss in consumer surplus is sometimes captured by the firms, but for low interaction costs, firms' profit-driven behavior is economically inefficient.

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    File URL: http://dx.doi.org/10.1287/mksc.1050.0128
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 24 (2005)
    Issue (Month): 4 (February)
    Pages: 569-584

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    Handle: RePEc:inm:ormksc:v:24:y:2005:i:4:p:569-584

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    Related research

    Keywords: customization; product differentiation; competition; game theory; personalization;

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    Citations

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    Cited by:
    1. Oksana Loginova & X. Hnery Wang, 2010. "Mass Customization with Vertically Differentiated Products," Working Papers 0814, Department of Economics, University of Missouri.
    2. Loginova Oksana, 2012. "Competitive Effects of Mass Customization," Review of Marketing Science, De Gruyter, vol. 10(1), pages 1-32, October.
    3. Loginova, Oksana & Wang, X. Henry, 2013. "Mass customization in an endogenous-timing game with vertical differentiation," Economic Modelling, Elsevier, vol. 33(C), pages 164-173.
    4. Bernhardt, Dan & Liu, Qihong & Serfes, Konstantinos, 2007. "Product customization," European Economic Review, Elsevier, vol. 51(6), pages 1396-1422, August.
    5. Rajagopalan, S. & Xia, Nan, 2012. "Product variety, pricing and differentiation in a supply chain," European Journal of Operational Research, Elsevier, vol. 217(1), pages 84-93.
    6. Oksana Loginova & X. Hnery Wang, 2013. "Customization in an Endogenous-Timing Game with Vertical Differentiation," Working Papers 1304, Department of Economics, University of Missouri.
    7. Fogliatto, Flavio S. & da Silveira, Giovani J.C. & Borenstein, Denis, 2012. "The mass customization decade: An updated review of the literature," International Journal of Production Economics, Elsevier, vol. 138(1), pages 14-25.
    8. Takagoshi, Noritsugu & Matsubayashi, Nobuo, 2013. "Customization competition between branded firms: Continuous extension of product line from core product," European Journal of Operational Research, Elsevier, vol. 225(2), pages 337-352.

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