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Demand for Customized Products, Production Flexibility, and Price Competition

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  • William Novshek
  • Lynda Thoman

Abstract

We examine markets where, in addition to production of standard (core) products, mass customization is technologically feasible. We compare a setting where a monopolist provides both standard and custom goods to a setting where an entrant joins the custom market, and find customers' tastes affect the social desirability of entry. The entrant is unconcerned about the impact of his custom production on the incumbent's core product market and in some cases may supply more custom products than is socially desirable. In contrast to previous literature, we show that increased variability of demand may lead to a reduction in investment in flexible production technologies. ZUSAMMENFASSUNG - (Nachfrage nach Spezialprodukten, Fertigungsflexibilität und Preiswettbewerb) In diesem Beitrag werden Märkte untersucht, auf denen zusätzlich zur Produktion von Standardprodukten die Herstellung von Spezialprodukten in großen Stückzahlen ("mass customization") technologisch möglich ist. Es wird eine Situation verglichen, in der ein Monopolist sowohl Standard- als auch Spezialprodukte anbietet mit einer Situation, in der der eintretende Konkurrent den Markt für Spezialprodukte bedient. Der Vergleich zeigt, daß der Kundengeschmack die soziale Wünschbarkeit des Eintritts beeinflußt. Für den Eintretenden ist es unerheblich wie sich seine Spezialprodukte auf den Hauptproduktmarkt des eingesessenen Unternehmens auswirken und in manchen Fällen kann es dazu kommen, daß er mehr Spezialprodukte anbietet als gesellschaftlich wünschbar. Im Gegensatz zur bisherigen Literatur wird gezeigt, daß zunehmende Variabilität der Nachfrage zu einer Verringerung von Investitionen in flexible Fertigungstechnologien führen kann.

Suggested Citation

  • William Novshek & Lynda Thoman, 1999. "Demand for Customized Products, Production Flexibility, and Price Competition," CIG Working Papers FS IV 99-37, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    • Handle: RePEc:wzb:wzebiv:fsiv99-37
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    References listed on IDEAS

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    1. Larry Epstein, 1978. "Production Flexibility and the Behaviour of the Competitive Firm under Price Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(2), pages 251-261.
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    10. repec:bla:jindec:v:47:y:1999:i:3:p:345-72 is not listed on IDEAS
    11. Fleischer, Manfred, 1997. "The inefficiency trap: strategy failure in the German machine tool industry," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 122877, September.
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    2. Astrid Jung, 2001. "Are Product Innovation and Flexible Technology Complements?," CIG Working Papers FS IV 01-07, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Feb 2003.
    3. Chen, Shiuann-Shuoh & Choubey, Bhaskar & Singh, Vinay, 2021. "A neural network based price sensitive recommender model to predict customer choices based on price effect," Journal of Retailing and Consumer Services, Elsevier, vol. 61(C).
    4. Fogliatto, Flavio S. & da Silveira, Giovani J.C. & Borenstein, Denis, 2012. "The mass customization decade: An updated review of the literature," International Journal of Production Economics, Elsevier, vol. 138(1), pages 14-25.

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