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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/29474
Title: Mass Customization with Vertically Differentiated Products
Authors: Loginova, Oksana - University of Missouri
Wang, X. Henry - University of Missouri
Keywords: customization, horizontal differentiation, vertical differentiation
Issue Date: 2008
Series/Report no.: Net Institute Working Paper;08-33
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.
URI: http://hdl.handle.net/2451/29474
Appears in Collections:NET Institute Working Papers Series

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