A Competitive Model of Customization with Lead‐Time Effects

Abstract

In this article, we study the competitive interactions between a firm producing standard products and a firm producing custom products. Consumers with heterogeneous preferences choose between n standard products, which may not meet their preferences exactly but are available immediately, and a custom product, available only after a certain lead time l. Standard products incur a variety cost that increases with n and custom products incur a lead time cost that is decreasing in the lead time l. We consider a two-stage game wherein at stage 1, the standard product firm chooses the variety and the custom firm chooses the lead time and then both firms set prices simultaneously. We characterize the subgame-perfect Nash equilibrium of the game. We find that both firms can coexist in equilibrium, either sharing the market as local monopolists or in a price-competitive mode. The standard product firm may offer significant or minimal variety depending on the equilibrium outcome. We provide several interesting insights on the variety, lead time, and prices of the products offered and on the impact of problem parameters on the equilibrium outcomes. For instance, we show that the profit margin and price of the custom product are likely to be higher than that of standard products in equilibrium under certain conditions. Also, custom firms are more likely to survive and succeed in product markets with larger potential market sizes. Another interesting insight is that increased consumer sensitivity to product fit may result in lower lead time for the custom product.

Integrated Product and Channel Decision in Mass Customization

“…Thus, there is a lead time between the time when the customer places an order and the delivery of the mass-customized product to the customer. If the lead time is long, then a customer may be unwilling to wait for the product [30]. The percentage of customers choosing masscustomized products depends on the relative price of custom product to that of standard product and the waiting time of a customized product.…”

“…In addition, the emergence of flexible manufacturing systems and the Internet has increased firms' capabilities to offer greater customization [30]. Given its successful implementation in different companies including Dell computers, mi Adidas, and National Bicycle, mass customization strategy has been identified as a competitive strategy by an increasing number of companies and has recently attracted the attention of both researchers and practitioners.…”

Pricing model and application of new materials in power transmission and transformation engineering

“…From the perspective of foreign studies, Dewan and Jing et al (2003) [1] applied the competition model of standard products and customized products to the network environment to analyse the optimal product mix of standard products and customized products, and how customization affects price competition. Xia and Rajagopalan (2009) [2] constructed a model to determine the variety, delivery time, and price of two commodities in a competitive environment. Zheng and Chiu et al (2012) [3] analysed the optimal advertising and pricing strategies of luxury brands in the market and studied the optimal product strategies and pricing schemes by exploring different sales strategies.…”

The impact of product variety on fill rate, inventory and sales performance in the consumer goods industry

“…Product variety strategies commonly create more demand and improve sales performance (Lancaster, 1990; Nan and Rajagopalan, 2009). Our results indicate that increases in product variety did not help to boost sales performance in the Brazilian toothpaste company.…”