Competitive Effects of Mass Customization

Oksana Loginova ()
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Oksana Loginova: Department of Economics, University of Missouri-Columbia, https://economics.missouri.edu/people/loginova

No 1007, Working Papers from Department of Economics, University of Missouri

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 affective 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.

Keywords: horizontal di fferentiation; price competition; customization; brand familiarity; product knowledge (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 (search for similar items in EconPapers)
Pages: 21
Date: 2010-05-18
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Review of Marketing Science 2012

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