Selecting a customization strategy under competition: Mass customization, targeted mass customization, and product proliferation

Customization requires not only an implementation of proper manufacturing systems but also a proper strategy regarding when firms should offer customized products and what the nature of customization should be. This paper questions 1) whether customization is better than no customization, and, if so, 2) what kind of customization strategy firms should adopt under competition. We find that customization is not optimal when the cost of soliciting customer preference information is sufficiently high. When competing firms choose to customize, we show that firms target only certain customer segments with customized products. We also find that the optimal customization strategy may require firms to offer only a few discrete product varieties. Despite the concern that customization may initiate price wars because customization reduces product differentiation, we find that customization does not escalate the price competition, because aggressive price competition exacerbates cannibalization. Although customers within the product line of a firm are charged higher. prices, we show that on average customers are better off when firms adopt customization. However, unless the customization is quite cheap, when firms choose to customize, we find that firms cannot generate more profits than when firms offer only a single product.