Mass Customization vs. Mass Production: Variety and Price Competition

Authors:
Aydın Alptekinoğlu;Charles J. Corbett
Affiliations:
Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611;Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095
Venue:
Manufacturing & Service Operations Management
Year:
2008

Citing 0
Cited 8

Assortment Planning and Inventory Decisions Under a Locational Choice Model

Management Science
Standard vs. Custom Products: Variety, Lead Time, and Price Competition

Marketing Science
Leadtime-Variety Tradeoff in Product Differentiation

Manufacturing & Service Operations Management
Optimal and Competitive Assortments with Endogenous Pricing Under Hierarchical Consumer Choice Models

Management Science
Optimal Algorithms for Assortment Selection Under Ranking-Based Consumer Choice Models

Manufacturing & Service Operations Management
Product and Price Competition with Satiation Effects

Management Science
Learning Consumer Tastes Through Dynamic Assortments

Operations Research
Optimal Return Service Charging Policy for a Fashion Mass Customization Program

Service Science

Quantified Score

Hi-index	0.00

Visualization

Abstract

We study competition between two multiproduct firms with distinct production technologies in a market where customers have heterogeneous preferences on a single taste attribute. The mass customizer (MC) has a perfectly flexible production technology and thus can offer any variety within a product space, represented by Hotelling's linear city. The mass producer (MP) has a more focused production technology and therefore offers a finite set of products in the same space. The MP can invest in more flexible technology, which reduces its cost of variety and hence allows it to offer a larger set of products; in the extreme, the MP can emulate the MC's technology and offer infinite variety. The firms simultaneously decide whether to enter the market, and the MP chooses its degree of product-mix flexibility on entry. Next, the MP designs its product line---i.e., the number and position of its products---the MC's perfectly flexible technology makes this unnecessary. Finally, both firms simultaneously set prices. We analyze the subgame-perfect Nash equilibrium in this three-stage game, allowing firm-specific fixed and variable costs that together characterize their production technology. We find that an MP facing competition from an MC offers lower product variety than an MP monopolist to reduce the intensity of price competition. We also find that the MP can survive this competition, even if it has higher fixed cost of production technology, higher marginal cost of production, or both.