Customization competition between branded firms: Continuous extension of product line from core product

We study a competition of product customization between two branded firms by a game‐theoretic approach. Firms produce products with two attributes: one attribute indicates a characteristic with regard to ‘function’ or ‘design’ of a product and the other indicates ‘taste’ or ‘flavor’ of the product, which reflects consumers’ brand/taste preferences. Two branded firms have their own specific core products and our customization is defined as a continuous extension of their product line from the core product only along the ‘function’ attribute. In particular, we allow asymmetric positions of core products, which may create the position advantage/disadvantage between firms. We suppose that consumers incur their selection costs with regard to finding their most favorable item among a rich variety of products and firms incur their customizing costs with regard to extending their product lines. We first show that in the equilibrium, branded firms should fundamentally adopt their customizations to cover the center space in the market as far as possible, regardless of the position of the competitor’s core product. Therefore, the position of the core product contributes to the creation of a competitive advantage: when one firm’s core product is located more closely to the center of the market than the competitor’s, its customization can always cover more range of the center space in the market, while keeping its degree of customization smaller than the competitor’s. Furthermore, we show some implications of unit‐cost improvement: in a short run, a firm is better off concentrating on the improvement of the unit selection cost rather than the unit customizing cost. In contrast, in a long run, both firms can benefit from the improvement of the unit customizing cost.