Standard vs. Custom Products: Variety, Lead Time, and Price Competition
AbstractIn this paper, we study the standardization and customization decisions of two firms in a competitive setting, along with variety, lead time, and price decisions. We incorporate consumer heterogeneity both in firm preference (or store convenience) and in product attribute preferences. We find that the equilibrium outcome depends on the cost efficiencies of the production technologies as well as the consumer sensitivity to product fit and lead time. We develop an index that signifies the relative attractiveness of the standardization and customization strategies, and the potential outcomes. We identify the strategic roles of product variety and lead time in the competition. In contrast to the previous literature, we find that increasing the variety will not intensify the price competition if there is sufficient firm differentiation. Rather, it relieves the price pressure for the firm as it satisfies consumer needs better and enables higher price premiums. We also analyze the impact of asymmetric variable costs, fixed costs, and brand reputation on the equilibrium decisions.
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Bibliographic InfoArticle provided by INFORMS in its journal Marketing Science.
Volume (Year): 28 (2009)
Issue (Month): 5 (09-10)
customization; product differentiation; product variety; competition;
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- Oksana Loginova & X. H. Wang, 2009.
"Customization: Ideal Varieties, Product Uniqueness and Price Competition,"
0904, Department of Economics, University of Missouri.
- Oksana Loginova & X. Henry Wang, 2009. "Customization: Ideal Varieties, Product Uniqueness and Price Competition," Economics Bulletin, AccessEcon, vol. 29(4), pages 2573-2581.
- Loginova Oksana, 2012.
"Competitive Effects of Mass Customization,"
Review of Marketing Science,
De Gruyter, vol. 10(1), pages 1-32, October.
- Oksana Loginova & X. Hnery Wang, 2010.
"Mass Customization with Vertically Differentiated Products,"
0814, Department of Economics, University of Missouri.
- Oksana Loginova & X. Henry Wang, 2008. "Mass Customization with Vertically Differentiated Products," Working Papers 08-33, NET Institute.
- Wong, Hartanto & Lesmono, Dharma, 2013. "On the evaluation of product customization strategies in a vertically differentiated market," International Journal of Production Economics, Elsevier, vol. 144(1), pages 105-117.
- 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.
- Xiao, Tiaojun & Choi, Tsan-Ming & Cheng, T.C.E., 2014. "Product variety and channel structure strategy for a retailer-Stackelberg supply chain," European Journal of Operational Research, Elsevier, vol. 233(1), pages 114-124.
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