Competitive Effects of Mass Customization

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Competitive Effects of Mass Customization

Please use this identifier to cite or link to this item: http://hdl.handle.net/10355/8361

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Title: Competitive Effects of Mass Customization
Author: Loginova, Oksana
Date: 2010-05-17
Publisher: Department of Economics
Citation: Loginova, O. (2010, May 17). Competitive Effects of Mass Customization. Department of Economics.
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 effective 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.
URI: http://hdl.handle.net/10355/8361

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  • Economics publications (MU) [120]
    The items in this collection are the scholarly output of the faculty, staff, and students of the Department of Economics.

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