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Product Customization

33 Pages Posted: 13 Oct 2005  

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Qihong Liu

University of Oklahoma - Department of Economics

Konstantinos Serfes

Drexel University - School of Economics

Date Written: August 14, 2006

Abstract

The advent of the Internet has revolutionized the way companies advertise, develop and distribute products. Firms can now customize their advertising messages and products to the particular characteristics and needs of customers. Customers themselves can create their own products. We investigate investments by firms in product customization capabilities within a duopoly model of horizontal product differentiation. We find that i) if brand name effects are not too strong, one firm emerges as a leader in product customization - firms make asymmetric investments in product customization technologies in order to reduce price competition, ii) if brand name effects are strong, both firms make extensive investments in product customization, and iii) the possibility of product customization can raise industry profits if brand names are weak, but not when they are strong.

Keywords: Product customization, Information acquisition, Brand name effects, Horizontal differentiation

JEL Classification: D43, L13, O30

Suggested Citation

Bernhardt, Dan and Liu, Qihong and Serfes, Konstantinos, Product Customization (August 14, 2006). Available at SSRN: https://ssrn.com/abstract=816125 or http://dx.doi.org/10.2139/ssrn.816125

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Qihong Liu

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

Konstantinos Serfes (Contact Author)

Drexel University - School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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