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Customization with Vertically Differentiated Products

Oksana Loginova () and X. Wang ()

No 903, Working Papers from Department of Economics, University of Missouri

Abstract: We study an asymmetric duopoly market in which the firms' products are initially differentiated in both variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties for consumers but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. For the customization stage we consider two different games: the simultaneous-move game and the endogenous-timing game. In the latter, whether customization choices are made simultaneously or sequentially is endogenously determined. We show that both quality and the timing of customization choices play important roles in determining the equilibrium outcome. Customization occurs only if the quality difference is sufficiently large. Endogenous timing 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, endogenous timing sometimes enables the lower quality firm to obtain an advantage that it would not have in the simultaneous-move game.

Keywords: customization; horizontal differentiation; vertical differentiation; endogenous timing. (search for similar items in EconPapers)
JEL-codes: D43 L13 C72 (search for similar items in EconPapers)
Date: 2009-01-31
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Published in Journal of Economics and Management Strategy 2011

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https://economics.missouri.edu/working-papers/2009/wp0903_loginova.pdf (application/pdf)

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Journal Article: Customization with Vertically Differentiated Products (2011)
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