Mass Customization with Vertically Differentiated Products
AbstractWe analyze a duopoly game in which products are initially differentiated in variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. We show that in equilibrium either both firms customize, only the higher quality firm customizes, or no firm customizes. Even if customization is costless, the firms might not customize. This happens when the quality difference between the firms is small. We explore how the total welfare changes with the fixed cost of customization. Interestingly, the relationship is not always monotonic. Contrasting with the situation when customization is not feasible, both consumer surplus and total welfare are higher when one or both firms customize.
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Bibliographic InfoPaper provided by Department of Economics, University of Missouri in its series Working Papers with number 0814.
Date of creation: 02 Jul 2010
Date of revision:
customization; horizontal differentiation; vertical differentiation;
Other versions of this item:
- Oksana Loginova & X. Henry Wang, 2008. "Mass Customization with Vertically Differentiated Products," Working Papers 08-33, NET Institute.
- 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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