What is the right production strategy for horizontally differentiated product: Standardization or mass customization?

Abstract In response to growing individualization of demand in the increasingly competitive market, more and more companies are considering mass customization (MC) as a new production strategy to enhance competitive advantage. This study develops an analytical model to investigate production strategy in a market where customers have heterogeneous preferences for product types. We analyze the assortment and pricing decisions under two different production strategies: standardization and mass customization. For the mass customization model, we address two kinds of production systems: a low level mass customization system (LMC) offering a limited product types and a high level mass customization system (HMC) with the capability of offering all product types. Our results reveal that HMC may not necessarily improve payoffs. With small disutility of type mismatch, LMC is preferred to HMC. We develop two effective decision policies based on operating cost and product value to identify an optimal production strategy.