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Customization in an Endogenous-Timing Game with Vertical  Differentiation

We study customization in a duopoly game in which the firms' products have different qualities. Whether customization choices are made simultaneously or sequentially is endogenously determined. Specifically, the customization stage of the game involves two periods. Each firm either selects its product type in period 1 or postpones this decision to period 2. We show that both quality and endogenous timing play important roles in determining the equilibrium outcome. Customization occurs only if the quality difference is sufficiently large. Endogeneity of timing in the customization stage sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were to make their customization choices simultaneously. Although the higher quality firm is more likely to customize, in some circumstances endogenous timing allows the lower quality firm to obtain an advantage that it would not have under simultaneous customization choices.

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File URL: http://economics.missouri.edu/working-papers/2010/WP1008_loginova_wang.pdf
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1008.

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Length: 20
Date of creation: 02 Jul 2010
Date of revision:
Handle: RePEc:umc:wpaper:1008
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  1. Oksana Loginova, 2009. "Brand Familiarity and Product Knowledge in Customization," Working Papers 0905, Department of Economics, University of Missouri.
  2. Alexei Alexandrov, 2006. "Fat Products," Discussion Papers 1435, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Hamilton, J.H. & Slutsky, S.M., 1988. "Endogenous Timing In Duopoly Games: Stackelberg Or Cournot Equilibria," Papers 88-4, Florida - College of Business Administration.
  4. Yuanzhu Lu, 2006. "Endogenous Timing in a Mixed Oligopoly with Foreign Competitors: the Linear Demand Case," Journal of Economics, Springer, vol. 88(1), pages 49-68, June.
  5. Emin M. Dinlersoz & Pedro Pereira, 2006. "On the Diffusion of Electronic Commerce," Working Papers 13, Portuguese Competition Authority.
  6. Bernhardt, Dan & Liu, Qihong & Serfes, Konstantinos, 2007. "Product customization," European Economic Review, Elsevier, vol. 51(6), pages 1396-1422, August.
  7. Amir, Rabah & Stepanova, Anna, 2006. "Second-mover advantage and price leadership in Bertrand duopoly," Games and Economic Behavior, Elsevier, vol. 55(1), pages 1-20, April.
  8. Romano, Richard & Yildirim, Huseyin, 2005. "On the endogeneity of Cournot-Nash and Stackelberg equilibria: games of accumulation," Journal of Economic Theory, Elsevier, vol. 120(1), pages 73-107, January.
  9. Matsumura, Toshihiro, 1999. "Quantity-setting oligopoly with endogenous sequencing," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 289-296, February.
  10. Oksana Loginova & X. Henry Wang, 2011. "Customization with Vertically Differentiated Products," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 475-515, 06.
  11. Niladri B. Syam & Ranran Ruan & James D. Hess, 2005. "Customized Products: A Competitive Analysis," Marketing Science, INFORMS, vol. 24(4), pages 569-584, February.
  12. Sadanand, Asha & Sadanand, Venkatraman, 1996. "Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility," Journal of Economic Theory, Elsevier, vol. 70(2), pages 516-530, August.
  13. 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.
  14. Edward C. Prescott & Michael Visscher, 1977. "Sequential Location among Firms with Foresight," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 378-393, Autumn.
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