Self-customization and price competition

Stefano Colombo () and Paolo Garella

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

Abstract: New technologies increasingly provide firms with abilities to design self-customizable products, that can be redeveloped by end-users at their own expenses. The decision to market only a standard product or also a self-customizable one is a strategic one; we analyze this decision in a duopoly with product differentiation. In our model adding a customizable product cannibalizes part of own demand but also allows exploitation of a distinct segment of consumers who attach high value to customizability; it also diverts demand from the rival firm. Firms use second degree price discrimination, attaching a different price to the different products. We find the conditions leading to both firms introducing the self-customizable product, both refraining from it, and to asymmetric equilibria. Our results indicate that self-customization appears in equilibrium; it is profit improving; it can be used by only one or both firms according to the value of the market for customizability. It also leads to lower prices. An increase in consumers’ ability to self-customize reduces profits, while a higher cost of self-customization increases profits. Finally a first-mover advantage arises in offering a self-customizable product.

Keywords: self-customization; pricing; duopoly (search for similar items in EconPapers)
JEL-codes: D4 L11 M31 (search for similar items in EconPapers)
Date: 2018-09-19
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Persistent link: https://EconPapers.repec.org/RePEc:mil:wpdepa:2018-09

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