Product-Line Competition: Customization vs. Proliferation

Consumers are increasingly demanding products that closely match their individual preferences, and advances in manufacturing and information technologies have made it possible to satisfy this demand. This can be done in two ways. Under the traditional approach, firms can produce a larger number of product variants, and the greater selection enables consumers to find products that are closer to their ideal choice. An alternative approach is based on mass customization (Pine 1993), whereby firms individually customize products to each customer’s specifications. In this paper, we study the determinants of product variety for a traditional firm that follows the first approach; compare it to a customizing firm; derive the optimal decisions of a dual-channel firm that operates both a traditional and a customizing channel; and study the results of competition between the two types of firms. There is a rich and diverse literature on product variety which cannot be fully surveyed here due to lack of space (cf. Ho and Tang 1998). Chen et al. (1998), De Groote (1994) and Gaur and Honhon (2004), consider a traditional firm’s optimal product-line, that is, its optimal product positions and prices. Dewan et al. (2003), Jiang et al. (2004), Alptekinoḡlu and Corbett (2004) and Mendelson and Parlaktürk (2004) consider product-line design when firms can customize their products. Past work on customization focused on the firm’s product design and pricing decisions without considering the roles of inventory fulfillment and delay, which are key operational features of the problem. In this paper, we explicitly model these aspects, incorporating the stocking of standard products and the make-to-order nature of customized products (and the associated delay), in addition to product design and pricing decisions.