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Mass Customization with Vertically Differentiated Products

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Abstract

We 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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  • Oksana Loginova & X. Henry Wang, 2008. "Mass Customization with Vertically Differentiated Products," Working Papers 08-33, NET Institute.
    • Handle: RePEc:net:wpaper:0833
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    References listed on IDEAS

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    1. Suresh Kotha, 1995. "Mass customization: Implementing the emerging paradigm for competitive advantage," Strategic Management Journal, Wiley Blackwell, vol. 16(S1), pages 21-42.
    2. Selladurai, R. S., 2004. "Mass customization in operations management: oxymoron or reality?," Omega, Elsevier, vol. 32(4), pages 295-300, August.
    3. Niladri B. Syam & Ranran Ruan & James D. Hess, 2005. "Customized Products: A Competitive Analysis," Marketing Science, INFORMS, vol. 24(4), pages 569-584, February.
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    5. Bernhardt, Dan & Liu, Qihong & Serfes, Konstantinos, 2007. "Product customization," European Economic Review, Elsevier, vol. 51(6), pages 1396-1422, August.
    6. Neven, D. & Thisse, J-F., 1989. "On Quality And Variety Competition," LIDAM Discussion Papers CORE 1989020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    More about this item

    Keywords

    customization; horizontal differentiation; vertical differentiation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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