Company-customer interaction in mass customization

In a game-theoretic model of mass customization, we integrate consumers into a manufacturer's production process and define the degree of company-customer interaction as level of mass customization. Adjusting an individually customized product to her preferences implies opportunity costs for the consumer. We study how the manufacturer's trade-off between diseconomies of scale and higher profit margins is affected by each consumer's trade-off between tailoring the product to her need and her interaction costs. Several key insights are offered: First, we find that the manufacturer finds it always optimal to offer customization and show how the optimal degree of customization is affected by the interplay of marketing and production factors. Second, we find that the degree of customization chosen by the manufacturer also maximizes consumer surplus so that customizing products is welfare enhancing. Third, we find that the manufacturer has an incentive to additionally offer a lower priced standard product given the costs of customization are sufficiently high.