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Competitive Effects of Mass Customization

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Abstract

Earlier theoretical literature on mass customization maintains that customization reduces product differentiation and intensifies price competition. In contrast, operations management studies argue that customization serves primarily to differentiate a company from its competitors. Interactive involvement of the customer in product design creates an affective relationship with the firm, relaxing price competition. This paper provides a model that incorporates consumer involvement to explain the phenomena described in the operations management literature. Two firms on the Hotelling line compete for a continuum of consumers with heterogeneous brand preferences. An exogenously given fraction of consumers is potentially interested in customization. Consumer benefits from customization are the rewards from a special shopping experience and the value of product customization (better fitting product); these benefits are higher for consumers located closer to the customizing brand. When a consumer purchases a customized product, he incurs the waiting cost. The firms decide whether to offer customization, then engage in price competition. I show that customization increases the ``stickiness" of a consumer to the customizing firm, leading to less intense price competition. As mass customization becomes more efficient (the lead time goes down and/or the sunk costs decrease), customization by one or both firms occurs in equilibrium. I perform comparative statics analysis with respect to the fraction of consumers potentially interested in customization.

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  • Oksana Loginova, 2010. "Competitive Effects of Mass Customization," Working Papers 1007, Department of Economics, University of Missouri.
  • Handle: RePEc:umc:wpaper:1007
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    Cited by:

    1. Jue-Shyan Wang & Shu-Ning Chan, 2014. "The Strategic Choice of the Firm with Customization Capability," Research in World Economy, Research in World Economy, Sciedu Press, vol. 5(2), pages 56-67, September.

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    More about this item

    Keywords

    horizontal di fferentiation; price competition; customization; brand familiarity; product knowledge;
    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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