Mass Customization in a competitive market place

An economic perspective on product customization is that it can add value by shrinking the difference between desired and actual product specification. At the heart of this economic argument is the concept of spatial product differentiation, which views products as lying along a continuum and customers as seeking a product closest to a specific point on that continuum. The products of a conventional manufacturer are at discrete locations, with significant distance between them, but customization allows a seller to reduce the separation between products.

Using this form of economic model, Dewan, Jing & Seidmann (2000) argue that the first mass customizer to enter a market will gain market share and profits at the expense of the conventional mass producer. Interestingly, the benefits disappear when competing sellers adopt customization, leading to all sellers ‘over-customizing’ to the detriment of their profits.

Nan Xia (2004) argues that if the custom made product has a longer lead time, it loses some of its attractiveness, and hence it is not obvious which firm has the advantage. He suspects the standard-product firm can profitably compete or even dominate the market even if it has a cost disadvantage, as long as it is not too large. What is more, he argues that the best strategy for the standard-product firm is to offer an even lower amount of variety than prior to the mass customizers entry.

Dewan, R., Jing, B. & Seidmann, A. (2000) "Adoption of Internet-Based Product Customization and Pricing Strategies", Journal of Management Information Systems, 17 (2) 9-28.

Xia, N. (2004) "Standard versus Custom Products: Monopoly and Competitive Models", Presented at INFORMS 2004, Denver, US. Also at www.marshall.usc.edu