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Brand Familiarity and Product Knowledge in Customization

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Abstract

This paper challenges the assumption commonly used in the theoretical literatureon customization that consumers always get their ideal varieties when theypurchase a customized product. I adopt Hotelling's horizontal diffierentiation modelwith two firms competing for a continuum of consumers. Each consumer has amost preferred variety and possesses a certain level of category-specific knowledge.Initially, the firms produce standard products located at the end points of the varietyinterval. Suppose one of the firms offers customization. Consumers familiarwith the brand can easily transfer their needs into appropriate characteristics ofthis brand. Consumers unfamiliar with the brand have difficulty in expressing theirpreferences. Category-specific knowledge is crucial here. Knowledgeable consumersare more capable of analyzing information than less knowledgeable ones, and theproducts they design better match their preferences. The game runs as follows.First, the firms simultaneously decide whether to offer customization, then engagein price competition. I show that while customization makes the products less differentiated, the frictions introduced into consumer co-design activities relax price competition. As a result, customization by one of the firms occurs in equilibrium.

Suggested Citation

  • Oksana Loginova, 2009. "Brand Familiarity and Product Knowledge in Customization," Working Papers 0905, Department of Economics, University of Missouri.
  • Handle: RePEc:umc:wpaper:0905
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    File URL: https://economics.missouri.edu/working-papers/2009/wp0905_loginova.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Neeraj Arora & Xavier Dreze & Anindya Ghose & James Hess & Raghuram Iyengar & Bing Jing & Yogesh Joshi & V. Kumar & Nicholas Lurie & Scott Neslin & S. Sajeesh & Meng Su & Niladri Syam & Jacquelyn Thom, 2008. "Putting one-to-one marketing to work: Personalization, customization, and choice," Marketing Letters, Springer, vol. 19(3), pages 305-321, December.
    3. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    4. Bernhardt, Dan & Liu, Qihong & Serfes, Konstantinos, 2007. "Product customization," European Economic Review, Elsevier, vol. 51(6), pages 1396-1422, August.
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    More about this item

    Keywords

    horizontal differentiation; price competition; customization; brand familiarity; product knowledge;

    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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