Adoption of internet-based product customization and pricing strategies

The Internet commerce technologies have significantly reduced sellers' costs of collecting buyer preference information and managing multiple prices, enabling cost efficient custom product design and differentiated pricing. Advanced manufacturing technologies have also improved sellers' manufacturing flexibility. We show that an early adopter of customization has a first-mover advantage, supporting the popular hypothesis that mass customization allows the seller to sell more and even charge more. The seller adopting customization will also provide standard products and will raise the price for his standard goods to protect the premium prices for the custom goods. When two competing sellers adopt the same customization strategies, however, they both will be compelled to over-invest in customization and will be worse off. Adopting customization by both sellers will lead to reduced product differentiation but not intensified price competition between their standard products because the premium prices for custom goods help relax the conventional market price competition. Surprisingly, when choosing product strategies simultaneously, both sellers will pick customization, resulting in the well-known Prisoner's Dilemma. Total buyer surplus does improve after sellers adopt customization. In addition, our results also confirm some key findings in IT productivity and strategic IT investments literature.