Economics of product development by users: The impact of ‘sticky’ local information

Those who solve more of a given type of problem tend to get better at it—which suggests that problems of any given type should be brought to specialists for a solution. However, in this paper we argue that agency-related costs and information transfer costs (‘sticky’ local information) will tend to drive the locus of problem-solving in the opposite direction—away from problem-solving by specialist suppliers, and towards those who directly benefit from a solution and who have difficult-to-transfer local information about a particular application being solved, such as the direct users of a product or service. We examine the actual location of design activities in two fields in which custom products are produced by ‘mass-customization’ methods: application-specific integrated circuits and computer telephony integration systems. In both, we find that users rather than suppliers are the actual designers of the application-specific portion of the product types examined. We offer anecdotal evidence that the pattern of user-based customization we have documented in these two fields is in fact quite general, and we discuss implications for research and practice.