Mass Customization with Vertically Differentiated Products

Oksana Loginova () and X. Henry Wang ()
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X. Henry Wang: Department of Economics, University of Missouri

No 08-33, Working Papers from NET Institute

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.

Keywords: customization; horizontal differentiation; vertical differentiation (search for similar items in EconPapers)
JEL-codes: D43 L13 C72 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mic
Date: 2008-09, Revised 2008-09

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