IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v50y2004i2p145-158.html
   My bibliography  Save this article

Collaborative Prototyping and the Pricing of Custom-Designed Products

Author

Listed:
  • Christian Terwiesch

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Christoph H. Loch

    (INSEAD, Boulevard de Constance, 77305 Fontainebleau, Cedex, France)

Abstract

A major challenge in the creation of custom-designed products lies in the elicitation of customer needs. As customers are frequently unable to accurately articulate their needs, designers typically create one or several prototypes, which they then present to the customer. This process, which we call collaborative prototyping, allows both parties to anticipate the outcome of the design process. Prototypes have two advantages: They help the customer to evaluate the unknown customized product, and they guide both parties in the search for the ideal product specification. Collaborative prototyping involves two economic agents, with different information structures and different---and potentially conflicting---objective functions. This raises several interesting questions: how many prototypes should be built, who should pay for them, and how should they and the customized product be priced. We show that, depending on the design problem and the market characteristics, the designer should offer prototypes at a profit, at cost, or even for free.

Suggested Citation

  • Christian Terwiesch & Christoph H. Loch, 2004. "Collaborative Prototyping and the Pricing of Custom-Designed Products," Management Science, INFORMS, vol. 50(2), pages 145-158, February.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:2:p:145-158
    DOI: 10.1287/mnsc.1030.0178
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1030.0178
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.1030.0178?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    2. Christoph H. Loch & Christian Terwiesch & Stefan Thomke, 2001. "Parallel and Sequential Testing of Design Alternatives," Management Science, INFORMS, vol. 47(5), pages 663-678, May.
    3. Christian Terwiesch & Christoph H. Loch, 1999. "Measuring the Effectiveness of Overlapping Development Activities," Management Science, INFORMS, vol. 45(4), pages 455-465, April.
    4. Sridhar Moorthy & Kannan Srinivasan, 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs," Marketing Science, INFORMS, vol. 14(4), pages 442-466.
    5. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-654, May.
    6. Karl T. Ulrich & David J. Ellison, 1999. "Holistic Customer Requirements and the Design-Select Decision," Management Science, INFORMS, vol. 45(5), pages 641-658, May.
    7. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
    8. Eli M. Snir & Lorin M. Hitt, 2003. "Costly Bidding in Online Markets for IT Services," Management Science, INFORMS, vol. 49(11), pages 1504-1520, November.
    9. Stefan Thomke & David E. Bell, 2001. "Sequential Testing in Product Development," Management Science, INFORMS, vol. 47(2), pages 308-323, February.
    10. Julia Liebeskind & Richard P. Rumelt, 1989. "Markets for Experience Goods with Performance Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 601-621, Winter.
    11. Udo Zander & Bruce Kogut, 1995. "Knowledge and the Speed of the Transfer and Imitation of Organizational Capabilities: An Empirical Test," Organization Science, INFORMS, vol. 6(1), pages 76-92, February.
    12. Ely Dahan & Haim Mendelson, 2001. "An Extreme-Value Model of Concept Testing," Management Science, INFORMS, vol. 47(1), pages 102-116, January.
    13. James J. Anton & Dennis A. Yao, 1990. "Measuring the effectiveness of competition in defense procurement: A survey of the empirical literature," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 9(1), pages 60-79.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Morvarid Rahmani & Guillaume Roels & Uday S. Karmarkar, 2018. "Team Leadership and Performance: Combining the Roles of Direction and Contribution," Management Science, INFORMS, vol. 64(11), pages 5234-5249, November.
    2. Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2010. "Idea Generation and the Quality of the Best Idea," Management Science, INFORMS, vol. 56(4), pages 591-605, April.
    3. Morvarid Rahmani & Karthik Ramachandran, 2021. "Delegating Innovation Projects with Deadline: Committed vs. Flexible Stopping," Management Science, INFORMS, vol. 67(10), pages 6317-6332, October.
    4. Natalia Levina, 2005. "Collaborating on Multiparty Information Systems Development Projects: A Collective Reflection-in-Action View," Information Systems Research, INFORMS, vol. 16(2), pages 109-130, June.
    5. Wenqiang Xiao & Yi Xu, 2012. "The Impact of Royalty Contract Revision in a Multistage Strategic R&D Alliance," Management Science, INFORMS, vol. 58(12), pages 2251-2271, December.
    6. Xu, Xiaoyan & Choi, Tsan-Ming & Chung, Sai-Ho & Guo, Shu, 2023. "Collaborative-commerce in supply chains: A review and classification of analytical models," International Journal of Production Economics, Elsevier, vol. 263(C).
    7. Christian Terwiesch & Yi Xu, 2008. "Innovation Contests, Open Innovation, and Multiagent Problem Solving," Management Science, INFORMS, vol. 54(9), pages 1529-1543, September.
    8. Shivam Gupta & Anupam Agrawal & Jennifer K. Ryan, 2023. "Agile contracting: Managing incentives under uncertain needs," Production and Operations Management, Production and Operations Management Society, vol. 32(3), pages 972-988, March.
    9. Taylor Randall & Christian Terwiesch & Karl T. Ulrich, 2007. "Research Note—User Design of Customized Products," Marketing Science, INFORMS, vol. 26(2), pages 268-280, 03-04.
    10. Anuj Kumar & Rahul Telang, 2011. "Product Customization and Customer Service Costs: An Empirical Analysis," Manufacturing & Service Operations Management, INFORMS, vol. 13(3), pages 347-360, July.
    11. Sanjiv Erat & Vish Krishnan, 2012. "Managing Delegated Search Over Design Spaces," Management Science, INFORMS, vol. 58(3), pages 606-623, March.
    12. Sanjiv Erat & Stylianos Kavadias, 2008. "Sequential Testing of Product Designs: Implications for Learning," Management Science, INFORMS, vol. 54(5), pages 956-968, May.
    13. Tingliang Huang & Chao Liang & Jingqi Wang, 2018. "The Value of “Bespoke”: Demand Learning, Preference Learning, and Customer Behavior," Management Science, INFORMS, vol. 64(7), pages 3129-3145, July.
    14. Morvarid Rahmani & Guillaume Roels & Uday S. Karmarkar, 2017. "Collaborative Work Dynamics in Projects with Co‐Production," Production and Operations Management, Production and Operations Management Society, vol. 26(4), pages 686-703, April.
    15. Chhabra, Meenal & Das, Sanmay & Sarne, David, 2014. "Expert-mediated sequential search," European Journal of Operational Research, Elsevier, vol. 234(3), pages 861-873.
    16. Amit Basu & Sreekumar Bhaskaran, 2018. "An Economic Analysis of Customer Co-design," Information Systems Research, INFORMS, vol. 29(4), pages 787-804, December.
    17. Gil, Nuno & Tether, Bruce S., 2011. "Project risk management and design flexibility: Analysing a case and conditions of complementarity," Research Policy, Elsevier, vol. 40(3), pages 415-428, April.
    18. ZHU Chen & MOTOHASHI Kazuyuki, 2024. "The Fundraising of AI Startups: Evidence from web data," Discussion papers 24021, Research Institute of Economy, Trade and Industry (RIETI).
    19. Kevin J. Boudreau & Nicola Lacetera & Karim R. Lakhani, 2011. "Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis," Management Science, INFORMS, vol. 57(5), pages 843-863, May.
    20. Yimin Wang, 2013. "Specification vagueness and supply quality risk," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(3), pages 222-236, April.
    21. Haruvy, Ernan E. & Li, Tao & Sethi, Suresh P., 2012. "Two-stage pricing for custom-made products," European Journal of Operational Research, Elsevier, vol. 219(2), pages 405-414.
    22. Plambeck, Erica L. & Taylor, Terry A., 2004. "Partnership in a Dynamic Production System," Research Papers 1892, Stanford University, Graduate School of Business.
    23. Hoffmann, Florian & Inderst, Roman, 2011. "Pre-sale information," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2333-2355.
    24. Ajay Bhaskarabhatla, 2016. "The Moderating Role of Submarket Dynamics on the Product Customization–Firm Survival Relationship," Organization Science, INFORMS, vol. 27(4), pages 1049-1064, August.
    25. Tian Heong Chan & Jürgen Mihm & Manuel E. Sosa, 2018. "On Styles in Product Design: An Analysis of U.S. Design Patents," Management Science, INFORMS, vol. 64(3), pages 1230-1249, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christian Terwiesch & Yi Xu, 2008. "Innovation Contests, Open Innovation, and Multiagent Problem Solving," Management Science, INFORMS, vol. 54(9), pages 1529-1543, September.
    2. Stylianos Kavadias & Svenja C. Sommer, 2009. "The Effects of Problem Structure and Team Diversity on Brainstorming Effectiveness," Management Science, INFORMS, vol. 55(12), pages 1899-1913, December.
    3. Sanjiv Erat & Stylianos Kavadias, 2008. "Sequential Testing of Product Designs: Implications for Learning," Management Science, INFORMS, vol. 54(5), pages 956-968, May.
    4. Thomas Gillier & Sylvain Lenfle, 2015. "Experimenting in the unknown : lessons from the Manhattan project," Working paper serie RMT - Grenoble Ecole de Management hal-01483018, HAL.
    5. Svenja C. Sommer & Elliot Bendoly & Stylianos Kavadias, 2020. "How Do You Search for the Best Alternative? Experimental Evidence on Search Strategies to Solve Complex Problems," Management Science, INFORMS, vol. 66(3), pages 1395-1420, March.
    6. Sanjiv Erat & Vish Krishnan, 2012. "Managing Delegated Search Over Design Spaces," Management Science, INFORMS, vol. 58(3), pages 606-623, March.
    7. Puay Khoon Toh & Gautam Ahuja, 2022. "Integration and appropriability: A study of process and product components within a firm's innovation portfolio," Strategic Management Journal, Wiley Blackwell, vol. 43(6), pages 1075-1109, June.
    8. Thomas Gillier & Sylvain Lenfle, 2015. "Experimenting in the unknown : lessons from the Manhattan project," Working Papers hal-01483018, HAL.
    9. Otso Massala & Ilia Tsetlin, 2015. "Search Before Trade-offs Are Known," Decision Analysis, INFORMS, vol. 12(3), pages 105-121.
    10. Pavel Kireyev, 2016. "Markets for Ideas: Prize Structure, Entry Limits, and the Design of Ideation Contests," Harvard Business School Working Papers 16-129, Harvard Business School.
    11. Laura J. Kornish & Karl T. Ulrich, 2011. "Opportunity Spaces in Innovation: Empirical Analysis of Large Samples of Ideas," Management Science, INFORMS, vol. 57(1), pages 107-128, January.
    12. Radkevitch, U.L. & van Heck, H.W.G.M. & Koppius, O.R., 2006. "Buyer Commitment and Opportunism in the Online Market for IT Services," ERIM Report Series Research in Management ERS-2006-046-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    13. Radkevitch, U.L. & van Heck, H.W.G.M. & Koppius, O.R., 2008. "Choosing between Auctions and Negotiations in Online B2B Markets for IT Services: The Effect of Prior Relationships and Performance," ERIM Report Series Research in Management ERS-2008-004-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    14. repec:spo:wpmain:info:hdl:2441/2si2or72bc8ed899298h75877i is not listed on IDEAS
    15. Markus Hoppe & Avner Engel & Shalom Shachar, 2007. "SysTest: Improving the verification, validation, and testing process— Assessing six industrial pilot projects," Systems Engineering, John Wiley & Sons, vol. 10(4), pages 323-347, December.
    16. Cagé, Julia & Rouzet, Dorothée, 2015. "Improving “national brands”: Reputation for quality and export promotion strategies," Journal of International Economics, Elsevier, vol. 95(2), pages 274-290.
    17. Julia Cage & Dorothée Rouzet, 2015. "Improving “National Brands”: Reputation for Quality and Export Promotion Strategies," SciencePo Working papers hal-01167909, HAL.
    18. Sam Ransbotham & Sabyasachi Mitra, 2010. "Target Age and the Acquisition of Innovation in High-Technology Industries," Management Science, INFORMS, vol. 56(11), pages 2076-2093, November.
    19. Krahmer, Daniel, 2003. "Entry and experimentation in oligopolistic markets for experience goods," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1201-1213, October.
    20. Laura J. Kornish & Jeremy Hutchison‐Krupat, 2017. "Research on Idea Generation and Selection: Implications for Management of Technology," Production and Operations Management, Production and Operations Management Society, vol. 26(4), pages 633-651, April.
    21. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:50:y:2004:i:2:p:145-158. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.