This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Dewan, R. Articles by Seidmann, A. Search for Related Content

Product Customization and Price Competition on the Internet

Simon School of Business, University of Rochester, Rochester, New York 14627
Stern School of Business, New York University, New York, New York 10012
Simon School of Business, University of Rochester, Rochester, New York 14627
dewan{at}simon.rochester.edu
bjing{at}stern.nyu.edu
seidmannav{at}simon.rochester.edu

The Internet provides an unprecedented capability for sellers to learn about their customers and offer custom products at special prices. In addition, customization is more feasible today because of advances in manufacturing technologies that have improved sellers' manufacturing flexibility. We first develop a model of product customization and flexible pricing to incorporate the salient roles of the Internet and flexible manufacturing technologies in reducing the costs of designing and producing tailored consumer goods. We show how a monopoly seller may earn the highest profits by producing both standard and custom products and can raise prices for both types of products as customization and information collection technologies improve.

Simultaneous adoption of customization in a duopoly reduces the differentiation between their standard products but does not intensify price competition. Compared with a two-facility monopolist, the duopoly may underinvest in customization. Consumer surplus improves after sellers adopt customization but does not monotonically increase as customization technologies advance. When firms face a fixed entry cost and adopt customization sequentially, the first entrant always achieves an advantage and may be able to deter subsequent entry by choosing its customization scope strategically.

Key Words: Mass Customization; Price Discrimination; Product Differentiation; Internet Economics
History: Received: December 1, 2000;

This article has been cited by other articles:

				N. Xia and S. Rajagopalan Standard vs. Custom Products: Variety, Lead Time, and Price Competition Marketing Science, September 1, 2009; 28(5): 887 - 900. [Abstract] [PDF]

				H. Mendelson and A. K. Parlakturk Product-Line Competition: Customization vs. Proliferation Management Science, December 1, 2008; 54(12): 2039 - 2053. [Abstract] [PDF]

				K. Hosanagar, J. Chuang, R. Krishnan, and M. D. Smith Service Adoption and Pricing of Content Delivery Network (CDN) Services Management Science, September 1, 2008; 54(9): 1579 - 1593. [Abstract] [PDF]

				S. Fay and J. Xie Probabilistic Goods: A Creative Way of Selling Products and Services Marketing Science, July 1, 2008; 27(4): 674 - 690. [Abstract] [PDF]

				H. Mendelson and A. K. Parlakturk Competitive Customization MSOM, June 1, 2008; 10(3): 377 - 390. [Abstract] [PDF]

				N. Syam, P. Krishnamurthy, and J. D. Hess That's What I Thought I Wanted? Miswanting and Regret for a Standard Good in a Mass-Customized World Marketing Science, May 1, 2008; 27(3): 379 - 397. [Abstract] [PDF]

				N. B. Syam and N. Kumar On Customized Goods, Standard Goods, and Competition Marketing Science, September 1, 2006; 25(5): 525 - 537. [Abstract] [PDF]

				N. B. Syam, R. Ruan, and J. D. Hess Customized Products: A Competitive Analysis Marketing Science, January 1, 2005; 24(4): 569 - 584. [Abstract] [PDF]