ACHIEVING FIRST-MOVER ADVANTAGE THROUGH PRODUCT CUSTOMIZATION ON THE INTERNET

The Internet provides an unprecedented capability for sellers to learn about their customers and offer custom products at special prices. Advanced manufacturing technologies have improved sellers’ manufacturing flexibility. To examine how these advances affect sellers’ products and pricing, we first develop a model of product customization and flexible pricing to incorporate the salient roles of the Internet and flexible manufacturing technologies in reducing the costs of designing and producing tailored consumer goods. Simultaneous adoption of customization in a duopoly will lead to reduced product differentiation but will not facilitate the price competition between their standard products. Consumer surplus improves after sellers adopt customization but does not always increase as technologies advance. When firms face a fixed entry cost and adopt customization sequentially, the first entrant always achieves a profit advantage and may even deter the entry of the second entrant by choosing his customization scope strategically.