Mass Customization Versus Mass Production: Variety and Price Competition

44 Pages Posted: 13 Jul 2006

See all articles by Aydin Alptekinoglu

Aydin Alptekinoglu

University of California, Los Angeles - Anderson School of Business

Charles J. Corbett

University of California, Los Angeles - Anderson School of Business

Date Written: November 16, 2005

Abstract

We study competition between two multi-product 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, thus can offer any variety within a product space, represented by Hotelling's (1929) linear city. The mass producer (MP) has a more focused production technology, and therefore, it offers a finite set of products in the same space. 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,MP can emulate MC's technology and offer infinite variety. The firms simultaneously decide whether to enter the market, and MP chooses its degree of product-mix flexibility upon entry. Next, MP designs its product line, i.e., the number and position of its products; MC's perfectly flexible technology makes this unnecessary. Finally, both firms simultaneously set prices. We analyze the sub-game 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 compared to an MP monopolist, in order to reduce the intensity of price competition. We also find that MP can survive this competition even if it has higher fixed cost of production technology or higher marginal cost of production or both.

Keywords: Decisions, Operations, Technology Management, mass customization, mass production, price competition

Suggested Citation

Alptekinoglu, Aydin and Corbett, Charles J., Mass Customization Versus Mass Production: Variety and Price Competition (November 16, 2005). Available at SSRN: https://ssrn.com/abstract=913813 or http://dx.doi.org/10.2139/ssrn.913813

Aydin Alptekinoglu (Contact Author)

University of California, Los Angeles - Anderson School of Business ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Charles J. Corbett

University of California, Los Angeles - Anderson School of Business ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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