Too efficient to stop: the power of digital manufacturing in product customisation and market competition

Digital manufacturing technologies such as additive manufacturing significantly improve manufacturers' ability to customise products, but they also reshape competitive dynamics in markets with heterogeneous consumer preferences. This study examines how digital manufacturing influences firms' strategic decisions through its impact on product customisation. We develop a multi-stage decision model in which two competing manufacturers decide whether to adopt digital manufacturing, choose customisation levels, and compete in prices. Digital manufacturing improves customisation efficiency and reduces the disutility consumers experience from imperfect product fit, thereby altering demand allocation and market competition. When only one manufacturer adopts digital manufacturing, it offers better-fitting products and attracts consumers. However, when both manufacturers adopt, improved customisation expands the overlap between their effective product offerings, intensifying market competition. As a result, mutual adoption may reduce manufacturers' profits even though average product fit improves. We further show that manufacturers may face a Prisoner's Dilemma in technology adoption. From a welfare perspective, digital manufacturing increases consumer surplus through improved product fit, while its effect on social welfare depends on the balance between these benefits and intensified competition. These findings highlight that the value of digital manufacturing extends beyond operational benefits and depends critically on competitive responses and market structure.