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Customized Products: A Competitive Analysis

Listed author(s):
  • 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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    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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    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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    1. Yuxin Chen & Ganesh Iyer, 2002. "Research Note Consumer Addressability and Customized Pricing," Marketing Science, INFORMS, vol. 21(2), pages 197-208, November.
    2. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    3. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
    4. 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.
    5. Shaffer, G. & Zhang, Z.J., 1994. "Competitive Coupon Targeting," Papers 94-02, Michigan - Center for Research on Economic & Social Theory.
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