SSRN Id3685235

Is Adopting Mass Customization
a Path to Environmentally Sustainable Fashion?

Aydın Alptekinoğlu
Smeal College of Business, The Pennsylvania State University, University Park, PA 16802
aydin@psu.edu
Adem Örsdemir
School of Business, University of California Riverside, Riverside, CA 92521
adem.orsdemir@ucr.edu
January 20, 2022

Forthcoming in Manufacturing & Service Operations Management
Problem definition: In high-product-variety businesses like fashion, mass production (MP) systems create
environmental waste in the form of overproduction on a colossal scale. Mass customization (MC) has been
proposed – without solid evidence – as a solution. In this paper, we analyze whether MC can indeed offer a
win-win solution that helps both the bottom line and the environment. We also study the impact of three
real policy options: promoting MC, charging a disposal fee for overproduction, and recycling. Academic
/ practical relevance: There is increasing interest in mass-customizing fashion goods, not only because
consumers value customization, but also because MC is perceived to be environmentally friendly. Our paper
puts this advocacy for MC to test. We contribute to the literature, which has been largely silent on the issue,
by uncovering when MC offers a win-win and relating such market outcomes to policy ideas. Methodology:
We develop an analytical model of an MP firm adopting MC (going hybrid ). The firm’s profit-maximizing
variety, price and inventory decisions then form the basis of our understanding the environmental impact
of adopting MC and assessing various policy options. Results: Adopting MC can be a win-win, but it can
also increase overproduction and hurt the environment. Our policy analyses reveal two kinds of insights.
First kind is about whether a policy expands win-win outcomes – encouraging sustainable adoption of MC.
Among the policy ideas we explore, only promoting MC so as to increase consumers’ tolerance for waiting
for mass-customized products can do that unambiguously. Second kind of insight is about whether a policy
reduces the hybrid firm’s environmental impact. Only disposal fee and costly recycling programs can do
that unambiguously. Managerial implications: For MC adoption to be a win-win, policy makers must
(1) work on convincing consumers to wait for bespoke fashion, (2) target MP firms with low cost of variety
(high product mix flexibility) with disposal fees or costly recycling programs, and (3) encourage those with
relatively higher cost of variety to develop/acquire technology that would make recycling profitable.
Keywords : corporate, social and environmental responsibility; fashion industry; mass customization; mass
production; make-to-order; make-to-stock; overproduction; waste; postponement; product variety; additive
manufacturing; 3D printing.
1. Introduction
Mass customization (MC) is an operations management paradigm that rivals mass production
(MP). It aims to provide very high product variety on demand at affordable prices so that nearly
Electronic copy available at: https://ssrn.com/abstract=3685235

Adopting Mass Customization
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every consumer can buy what they truly want or prefer, rather than settle with some standard
product that an MP system delivers. It is often touted as an environmentally friendly way to
supply products, because it is predicated on making things that consumers actually want, as
opposed to making things based on a forecast of what they want. Ellen MacArthur Foundation, for
example, advocates for the following idea in a widely circulated white paper as a path for making
the “textile economy” more sustainable: “Scale up services to provide increased personalisation of
clothes at purchase” (Ellen MacArthur Foundation 2017, pp. 85-86). They argue that “[adopting]
clothing to individual body shapes and styles, allowing custom-made clothing to be delivered at
scale” is technologically feasible, and that this would “reduce brands’ need to discount or discard
overproduced items.” Moreover, The Business of Fashion and McKinsey predict that “rising take
up of on-demand will lead to a spike in personalisation, and a new generation of customised
clothing start-ups, creating a new definition of made-to-measure” (The Business of Fashion and
McKinsey 2019, p. 85). Finally, a well-researched popular book, Fashionopolis, devotes almost an
entire chapter to 3-D printing of apparel – one way to achieve MC in fashion (Thomas 2019, pp.
207-221). Thomas argues that “The true test of 3-D printing has been to see if it could repudiate—
and supplant—[mass production] model in a mechanized way” (p. 217) and illustrates the very
possibility of this through the work of several high-fashion designers and entrepreneurs.
Such calls to action are consistent with fashion business trends. The fashion industry is increas-
ingly interested in offering “bespoke” fashion – not only because consumers demand personalization
and customization but also because companies can and do market MC as an environmentally
friendly, guilt-free way to consume fashion (Tosone 2018, Wilson 2017). To cite a few exam-
ples, Red Thread (redthreadcollection.com) offers made-to-measure women clothing. J. Hilburn
(jhilburn.com) does the same for men. Ermenegildo Zegna, the Italian luxury fashion powerhouse,
customizes any of its products (Made for You pages of zegna.com). Vans, a subsidiary of VF Corpo-
ration, sells both mass-produced and mass-customized skateboarding shoes and backpacks. Unmade
mass-customizes knitwear to sell through several brands and online fashion platforms (e.g., Far-
fetch, and Opening Ceremony) and licenses its technology to several other brands (Thomas 2019,
pp. 217-221). They are clear-eyed about their sustainability focus; one of Unmade’s co-founders,
Kirsty Emery explains: “We want to change the planet in a positive way. People aren’t going to
stop buying clothes, so let’s make what people want and will wear” (Thomas 2019, p. 219).
Fashion has always been an inherently high-product-variety business, and this has been a major
contributor to its perceived and real wastefulness. Almost a natural result of high product variety
in an industry dominated by MP is overproduction, and fashion is no exception to this. Some
aggregate industry statistics might help establish the scale of the problem. FashionUnited, an
international B2B fashion platform, estimates that 30% of apparel is never sold, and most of this

3
unsold inventory eventually finds its way to landfill or gets burned (van Elven 2018). McKinsey’s
research shows that “clothing produced each year equates to 14 items of clothing for every person
on earth” and that “nearly 60% of all clothing produced ends up in incinerators or landfills within a
year of being made” (Remy et al. 2016). The extent of overproduction and mass disposal of fashion
goods often create controversy. For example, H&M has taken some heat for burning 19 tonnes of
new clothes – equivalent to about 50,000 pairs of jeans – in the year 2016, and this appears to be
quite a common and regular occurrence in fashion industry (Siegle 2018).
In contrast to the current enthusiasm that fashion industry has for various perceived or projected
sustainability benefits and implications of MC, academic literature has been largely silent on the
subject. Exceptions include case study based (e.g., Hankammer et al. 2016) and conceptual papers
(e.g., Niinimäki and Hassi 2011). These papers discuss potential sustainability benefits of MC,
including waste reduction (through less material use and less overproduction), efficient resource
consumption, and longer product lifespan; some are based on real industry settings, but none
offers empirical or theoretical evidence with the sole exception of experimental evidence that shows
mass-customized products might be in use longer (Alptekinoğlu et al. 2021).
In this paper we study whether and when adopting MC is environmentally friendly. We do
this by developing an analytical model of a mass producer firm moving to a hybrid operation,
which is designed to deliver products both via MP and MC. Our model endogenizes the firm’s
product variety, price and inventory decisions, and allows us to assert when expanding into MC is
a win-win for both the firm (higher profits) as well as the environment (less detrimental impact).
While fashion industry provides an important motivation and backdrop for our paper, our model
is broadly applicable to MP firms contemplating a hybrid future for themselves in some of their
product lines (e.g., IKEA office furniture, Wilson baseball gloves, Disney toys).
The essential elements of our model are consumer heterogeneity (represented by points on a
unit line à la Hotelling), uncertain market size (high or low), an MP technology saddled by a
fixed cost of product variety (as a function of the number of mass-produced products), and an
MC technology saddled by a lead time waiting cost (incurred by consumers who opt for a mass-
customized product). There are two key operational differences: (1) the MP technology operates
on a make-to-stock basis, whereas, the MC technology operates on a make-to-order basis (we also
treat an MTS-MTO model with partial postponement); (2) the MP technology offers finite variety
with no delay, whereas the MC technology offers infinite variety (it incurs zero cost for product
variety and can deliver on demand any product on the unit line at the same marginal cost) – albeit
after a lead time. Very low or zero product variety cost and some degree of MTO operation are
defining features of MC systems as they often have very high levels of production flexibility but
must operate on demand to cater for custom specifications (Alptekinoğlu and Corbett 2008).

4
We analytically characterize a firm’s optimal product variety, price and inventory decisions both
under a pure MP system (§3) and a hybrid system (§4), in which the firm has MP as well as MC
capabilities. The pure MP system represents the firm’s current operation, and the hybrid system its
potential future – if it adopts MC. Endogenizing mass-produced product variety and price endows
the analysis with a demand model that is responsive to consumer preferences over multiple products
and their price points. Higher mass-produced product variety, for example, leaves less of a need for
MC. Building on the optimal solutions under pure MP and hybrid operations, we then analyze and
compare the environmental impact of these two different market outcomes. Finally, we exercise the
model to understand the effects of several different policy options that have been gaining currency:
(1) promoting MC for sustainable fashion, as, for example, Ellen MacArthur Foundation does; (2)
imposing disposal fees for overproduction, as France is about to do (Karasz 2019, Templeton 2022);
and (3) running recycling programs, as H&M and Eileen Fisher, for example, do.
Our analytical comparison of the environmental impact of the firm with and without adopting
MC (§5), which is based on a product lifecycle analysis (LCA), reveals an interesting phenomenon.
MC can increase overproduction, and this can lead to a worse outcome for the environment than
pure MP. The firm’s operational risk calculus changes when it adopts MC – sometimes in a way
to take more risk for the mass-produced products by producing them for the high market size,
which results in an increase in overproduction as well as market coverage. This tends to occur for
moderate- and low-value products and when product variety is sufficiently costly.
The environmental impact comparison also leads us to several insights on when adopting MC
is a win-win from both profitability and environmental sustainability standpoints. We provide an
overview in Table 1 (notation to be introduced in more precision later). First, a win-win is more
likely for moderate to high product value (reservation price normalized by unit cost, r/c), moderate
to high fixed cost of product variety in MP (tracked by the parameter f ), and sufficiently low
disutility of waiting for the mass-customized product (w). All of these factors render adopting MC
more attractive to the firm, and we characterize precisely when that does not come at the expense
of the environment. Second, a moderate f favors a win-win more than a high f does, because the
latter leads to less-than-full market coverage and possibly production for the low market size by a
mass producer, which is harder to beat environmentally. A sufficiently low f leads to no need for
MC; MP becomes just as effective in delivering variety economically.
Certain policy interventions make sustainable adoption of MC more likely. We draw this insight
from a series of results that characterize when a policy expands the set of parameters that lead
to a win-win outcome (§6). Promoting MC to increase consumers’ tolerance for waiting for mass-
customized products (lower w) always helps in this regard – our cleanest policy result. Imposing

5
Table 1 Whether or not adopting MC is a win-win depends on product value and fixed cost of product variety
in mass production. The win-win outcome is sometimes conditional on w, the disutility of waiting for the
mass-customized product, or f , the variety cost parameter.
high moderate low variety cost

win-win
high win-win –
if w is not too high
win-win
moderate win-win –
if w and f are not too high
win-win
low product value win-lose –
if w is not too high
a disposal fee or recycling, when it is costly, expands the win-win outcomes only for firms with a
relatively low f . Recycling, when it is profitable, does so only for firms with a moderate-to-high f .
For hybrid firms – those that have already adopted MC – promoting MC as a matter of advocacy
or policy can actually backfire in the sense of making its environmental impact worse. This stems
from the possibility that MC can increase overproduction. Imposing a disposal fee or running a
costly recycling program always brings an improvement in a hybrid firm’s environmental impact,
whereas running a profitable recycling program is a mixed bag. This implies that as long as recycling
technologies are not at a point where recycling itself is profitable, promoting recycling is likely to
reduce the environmental impact of hybrid fashion companies. So, our policy insights recommend
caution to policy makers; a well-meaning intervention can backfire in some cases.
On the whole, these findings suggest that adopting MC can be a win-win for both the environment
and the bottom line under certain circumstances and the right policy interventions. Our research
essentially recommends cautious optimism on the questions of whether adopting MC offers a path
to environmentally sustainable fashion and whether certain policy levers can nudge firms toward a
win-win market outcome. The answer is a “qualified yes” – depending on product type and market
conditions, which we analytically characterize in full.
The proofs (Appendix A) and model parameter estimates based on fashion industry data
(Appendix B), which we use to generate plots illustrating our results, are available in an online
appendix. We also provide two major extensions of our base model and analysis in Appendix C
and D, which are available in the SSRN version of the paper (Alptekinoğlu and Örsdemir 2022).
2. Literature Review
We put an analytical lens on the question of whether a mass producer’s adoption of MC – as many
fashion companies consider these days – is necessarily good for the environment from a total product
lifecycle perspective, which encompasses production, overproduction, use, and disposal. Thus, two
streams of literature are related to our work: corporate, social and environmental responsibility
(CSER), and mass customization (MC).

6
The first stream investigates a plethora of CSER issues. A significant portion of it focuses on the
impact of government policies to stimulate CSER improvements. For example, Avcı et al. (2015)
study the adoption of electric vehicles (EVs) when consumers pay for the use of batteries that
can be switched on demand rather than buy a battery and charge it themselves. Lim et al. (2015)
study how range and resale anxieties impact mass adoption of EVs and investigate policies that
are conducive to adoption.
Other papers in this stream focus on CSER problems associated with sourcing from emerging
economies. Guo et al. (2016) study a firm’s sourcing decision choosing two types of suppliers: a
responsible supplier which adheres to all social and environmental responsibility standards and a
risky supplier which may not. Using industry data, Caro et al. (2021) investigate prevalence and
predictability of unauthorized subcontracting. Cho et al. (2019) investigate multinational firms’
inspection and pricing strategies to combat child labor in their supply chains. Kraft et al. (2018)
and Buell and Kalkancı (2021) study CSER issues that arise from incomplete or imperfect visibility
of supply chains. Örsdemir et al. (2019) study a firm’s decision to vertically integrate for CSER
in the presence of demand externalities and violation exposure possibility. Kalkancı et al. (2019)
provide an excellent review of this research stream, and Lee and Tang (2018) and Netessine (2021)
emphasize its importance to the society.
Overproduction, and the resulting environmental waste, has been a major sustainability prob-
lem in various industries, including fashion (Ellen MacArthur Foundation 2017). As a result, the
U.S. Environmental Protection Agency (EPA) has been promoting lean manufacturing principles
to curb overproduction (EPA 2019). Yet, the academic literature has not paid enough attention to
it; previous studies assume deterministic demand, and thus do not capture the impact of overpro-
duction. The only exception we are aware of, Raz et al. (2013), explores the link between product
design and environmental impact, and provides insights on how much of a role overproduction
plays in that link. Different from almost all of the literature, but consistent with the current state
of fashion industry, our work captures the effect of overproduction on the environment. In fact, as
our analysis demonstrates, overproduction is an important driver of our insights.
The second stream of literature related to our paper investigates MC. MC has been defined
as “developing, producing, marketing and delivering affordable goods and services with enough
variety and customization that nearly everyone finds exactly what they want” (Pine 1993, p. 44). As
opposed to the limited or nonexistent product variety of MP, which puts the emphasis on production
efficiency rather than choice. MC involves (1) customers choosing some aspects of product design
(customization), and, by corollary, (2) it involves some degree of MTO at an industrial scale (mass),
variously known as on-demand manufacturing or build-to-order. For example, Dell’s assemble-to-
order PCs involve partial MTO, because a portion of the process of making the product is executed

7
on demand. By contrast, locate-to-order systems (like some car dealers are using) do not count as
MC, because the product has been made to stock with no individual customer’s involvement in
specifying the product design.
Operations management views MC predominantly from a supply-side perspective. Paramount on
the supply side are capacity/leadtime management and inventory control issues (e.g., Alptekinoğlu
and Corbett 2010, Cattani et al. 2010, Jiang et al. 2006, Mendelson and Parlaktürk 2008, Xia
and Rajagopalan 2009). This stream has also studied more strategic issues, such as competitive
advantages and disadvantages of MC (e.g., Alptekinoğlu and Corbett 2008), supply chain design for
MC (e.g., Duray et al. 2000), demand and preference learning via MC (Huang et al. 2018), return
policies in MC (Esenduran et al. 2021) and brand dilution effect of MC (Çil and Pangburn 2017).
However, with the exception of conceptual discussions (e.g., Medini et al. 2012) and qualitative
analyses in a few case studies (e.g., Hankammer et al. 2016), and one behavioral paper (Alptekinoğlu
et al. 2021), this literature has been largely silent on the sustainability implications of MC. Our
paper is positioned precisely at that intersection: MC and sustainability.
Chen et al. (2021) explore three retail formats for deploying MC via a 3D printing technology.
One of their models (case 2) is closely related to our base model of hybrid firm operations in
that they also use a demand model à la Hotelling and a supply model à la newsvendor. Their
product and consumer locations are on a circle (vs. our unit line); they assume the market size
has a normal distribution (vs. our two-point discrete distribution). The key difference between the
two papers is on the core question. Profitability comparison of three retail formats is their central
issue. As a byproduct of their newsvendor analysis, they also offer some qualitative statements
about environmental impact – assuming that the firm internalizes the environmental impact of its
overproduction in the overage cost. Our core question is about the environmental impact of an
MP firm adopting MC. Consistent with that focus, and unlike Chen et al. (2021), we (1) develop
a product lifecycle analysis of environmental impact of a profit-maximizing firm that does not
necessarily internalize its impact, which reflects the reality of fashion better, and (2) build several
models to study policy-level implications.
We have one major overlap and one major difference with the MC literature. First, in our
model of MC (§4.1), we employ a very common abstraction to represent the idea of MC satisfying
the consumer’s true preference: a Hotelling line with (potentially) all points as mass-customized
products (e.g., Alptekinoğlu and Corbett 2008). However, unlike most papers in the MC literature,
our paper requires a model with random demand, because we want to study overproduction. (Other
MC papers with random demand include: Alptekinoğlu and Corbett (2010), Cattani et al. (2010),
Chen et al. (2021), Huang et al. (2018), Jiang et al. (2006).) Thus, our contribution does not lie in
modeling firm operations, but rather in applying well-established modeling machinery in a novel

8
domain (sustainability of fashion) to explore answers for novel questions (on MC being a win-win
and policies to make that more likely).
The current discourse on MC in the business press and how MC is touted in actual business
practice do highlight sustainability. In particular, MC is being promoted as a way to counter over-
production problems in various industries – most notably in fashion (Ellen MacArthur Foundation
2017, The Business of Fashion and McKinsey 2019, Thomas 2019). Therefore, it is timely, inter-
esting and important to understand how incorporating MC into existing operations, which are
dominated by MP practices, impacts firms’ profitability and environmental footprint. To that end,
we contribute to CSER and MC literatures by evaluating the potential of MC as an environmentally
sustainable and profitable business practice. Our paper is the first to study this.
3. The Mass Producer Firm

In this section we develop and analyze a model of a mass producer firm, which we refer to as the
MP firm for short. This is our benchmark model – representing the status quo. We later overlay
an MC technology on this model (§4) to understand the impact of adopting MC.
3.1. MP Model
We consider a mass producer firm, the MP firm, serving consumers who have heterogeneous tastes.
To represent the consumers’ taste spectrum as well as the product space, we use a unit Hotelling
line Θ = [0, 1]. Products that the MP firm offers (a decision) can be anywhere in Θ. The ideal
product of a given consumer can also be anywhere in Θ and is assumed to be uniformly distributed
on Θ. The utility a consumer with ideal product θ ∈ Θ derives from the product x ∈ Θ is
UM P (θ, x, pM P ) = r − pM P − t|x − θ|,
where r is the consumer’s reservation price for her ideal product, pM P is the product’s price (a
decision), and t is the disutility that the consumer suffers per unit distance between the product
and her ideal product. We assume the consumers have an outside option with zero utility; that is,
the consumer at θ prefers buying the product x to not buying it if the utility UM P (θ, x, pM P ) is
non-negative. And, every consumer opts for the utility-maximizing choice among the products the
MP firm offers and the outside option.
We assume that the market size (the number of consumers in the market), denoted by M , is
uncertain and that it follows a two-point distribution. In particular, we let

mH w.p. α
M=
mL w.p. 1 − α
.
and µ = αmH + (1 − α)mL , where 0 < α < 1 and mH > mL > 0. Thus, the market size is high (mH )
with probability α, or low (mL ) with probability 1 − α. As a result, the demand for each product

9
is also uncertain (has a two-point distribution), which allows us to study overproduction with a
parsimonious and tractable demand model. (See Huang et al. (2018) for a similar demand model.)
There are several decisions that the MP firm makes. First, the MP firm decides its product
variety – the number (n) and location of its products. The MP firm incurs a fixed cost that is
quadratic in the number of product variants it sells on the market; the total product variety cost
is f n2 . (This functional form allows a meaningful hybrid solution – developed in §4 – which is
appropriate in the fashion context, as there already are examples of hybrid firms and a hybrid
future appears far more plausible than a pure MC future.) Second, the MP firm sets a uniform
price pM P for all its products. Third, the MP firm makes a stocking decision qM P – how much
inventory of each product to carry – and incurs a production cost c for every unit it stocks (for
simplicity, we assume this cost is independent of production volume). Because the MP firm operates
on a make-to-stock basis, the stocking decisions occur before the realization of the market size
M . That is, the MP firm can over- or under-stock, and needs to consider the attendant trade-off.
Provided that consumer locations are uniformly distributed and the integrality of n is relaxed as
we do throughout the paper (a standard practice in the literature, e.g., Alptekinoğlu and Corbett
(2008), Xia and Rajagopalan (2009)), uniform prices and uniform stocking quantities are optimal.
To avoid trivial solutions we assume that c/α < r, which ensures the market is profitable.
Let λM P denote the market share of each product, which is also the length of the subinterval in
[0, 1] where consumers choose that product according to the consumer choice model detailed above
(nλM P ≤ 1). The MP firm’s objective is to maximize its expected profit,
Π(n, pM P , qM P ) = pM P nE[min{qM P , M λM P }] − (cnqM P + f n2 )

| {z } | {z }
MP firm’s total revenue MP firm’s total cost
where the expectation is taken with respect to the market size M .
3.2. MP Analysis
In this section, we characterize the MP firm’s optimal decisions. This analysis combined with the
analysis in the next section is helpful for understanding what drives the environmental impact of
MP with and without the addition of MC capability. We first start with how consumers choose
and how a product’s stocking quantity is related to its market share.
It is easy to see that in the optimal solution the utility of the consumers who are indifferent
between purchasing a particular product variant and not purchasing it must be zero. Hence, each
product variant xi must be at the mid-point between two indifferent consumers whose location θ0
satisfies the following equality:
r − pM P
r − t|xi − θ0 | − pM P = 0 ⇔ |xi − θ0 | = .
t

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The product variant xi is thus demanded by all the consumers located in between these two indiffer-
ent consumers, which implies that the market share of each product (the length of the subinterval
in [0, 1] that it covers) is λM P = 2(r − pM P )/t. From this, we have the following relationship:
t
pM P = r − λM P . (1)
2
There is a one-to-one correspondence between the price (pM P ) and the market share (λM P ) of a
product. Henceforth, we assume that the firm sets the market share of each product variant rather
than its price, and first state the optimal stocking quantity of a product variant given its market
.
share. Let λt = 2(r − c/α)/t be a threshold in market share. (All proofs are given in Appendix A.)
Lemma 1. For a given market share per product, λM P , the MP firm’s optimal stocking quantity
per product is qM P = λM P mH if λM P < λt , or qM P = λM P mL if λM P ≥ λt .
This result shows that for a smaller market share λM P , the firm is more likely to stock for the
high market size, and vice versa. In particular, if λM P < λt , the stocking quantity for each product
is λM P mH . As a result, if market size realization turns out to be high, demand and supply will
match; otherwise, they will not and there will be overproduction. On the other hand, if λM P ≥ λt ,
the stocking quantity for each product is λM P mL . Thus, if market size realization turns out to
be low, demand and supply will match; else, there will be underproduction. The intuition behind
Lemma 1 is that a smaller market share (λM P < λt ) means a higher price pM P , which makes it more
profitable to take higher risk by stocking for the high market size mH . (A similar dynamic occurs in
Huang et al. (2018)’s traditional system, because our demand model is similar to theirs; one major
difference is that we endogenize the mass-produced product variety.) Overall, the lemma hints that
a smaller market share per product (higher variety) tends to result in overproduction. This insight
proves helpful for establishing the relationship between product variety and production quantity,
and eventually for understanding the environmental impact of MP and hybrid systems.
To solve the MP firm’s global problem, we first derive the optimal stocking quantity and market
share for a given product variety n, and then endogenize the product variety decision. To be able to
state the overall solution, besides λt (defined right before Lemma 1), we need a few more notation:
. . .
β = µ/mL , λL = (r − c)/t, and λH = (r − c(β − 1 + α)/(αβ))/t, where β > 1 and 0 < λH < λL < 1.
There are four types of solutions to the MP firm’s problem:
µtλ2H

. ∗ ∗ ∗
Hu = n = , λM P = λH , qM P = λH mH , (2)
4f
r
. tµ 1 mH
Hc = n∗ = 3 , λ∗M P = ∗ , qM ∗
P = , (3)
4f n n∗
mL tλ2L

. ∗ ∗ ∗
Lu = n = , λM P = λL , qM P = λL mL , (4)
4f

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r
. ∗ 3
tmL ∗ 1 ∗ mL
Lc = n = , λM P = ∗ , qM P = ∗ . (5)
4f n n
In the first two solution types, Hu and Hc , the firm stocks for the high market size; and, in the
last two, Lu and Lc , for the low market size. The subscripts u and c indicate whether the market
is not fully covered (u for un-covered) and fully covered (c for covered), respectively. We refer to
the union of Hu and Hc as the outcome H, and to the union of Lu and Lc as the outcome L.
We are now ready to state the overall solution. Henceforth, we refer to a product that has a
sufficiently high cost-adjusted reservation price so that r/c ≥ κ2 a high-value product; a product
that has a sufficiently low cost-adjusted reservation price so that r/c < κ1 a low-value product; and
all other products, which have κ1 ≤ r/c < κ2 , a moderate-value product. (The thresholds are all
defined in the proof; furthermore, κ1 < κ2 .)
Proposition 1. The following cases characterize the optimal product variety, pricing, and
stocking decisions of the MP firm.
1. For a high-value product (r/c ≥ κ2 ) the solution is
(a) Hu when f > fH , or
(b) Hc when f ≤ fH .
2. For a moderate-value product (κ1 ≤ r/c < κ2 ) the solution is
(a) Lu when f > fL ,
(b) Lc when fL ≥ f ≥ fcu ,
(c) Hu when fcu > f > fH , or
(d) Hc when f ≤ fH .
3. For a low-value product (r/c < κ1 ) the solution is
(a) Lu when f > fL ,
(b) Lc when fL ≥ f ≥ fc , or
(c) Hc when f < fc .
Figure 1 depicts the result. (In this and all other figures, we use realistic model parameters
drawn from the fashion industry, except for w and s; see Appendix B.) Although, there are several
cases in the proposition, the essence of the result is that high product value (r/c) and low product
variety cost (f ) lead the firm to the solution H, i.e., stocking for the high market size. Noting that
a lower f leads to a higher optimal product variety n∗ , since it is cheaper to introduce more variety,
it also follows that a high product value (r/c) and a high product variety (n) result in solution
H. Additionally, a low f increases the firm’s propensity to cover the market (c) through increased
product variety.

12
14 000
12 000
10 000
8000
6000
4000
2000
0
11 12 13 14 15
Figure 1 An example solution to the MP firm’s problem, where dashed lines separate low-, moderate- and
high-value product cases. (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5).
For high-value products, the firm always stocks for the high market size, but covers the entire
market only when the product variety cost is sufficiently small (f ≤ fH ). For moderate-value prod-
ucts, it stocks for the high market size (solution H) when the product variety cost is sufficiently
small (f < fcu ); otherwise, it stocks for the low market size (solution L). In either case, it covers
the entire market when the product variety cost is sufficiently small. Finally, the case of low-value
products is similar to the moderate-value case, except that Hu disappears. Essentially, as product
value (r/c) decreases, stocking for the low market size becomes preferable, and thus Lc expands
over Hu , eventually replacing it completely for sufficiently low-value products (see Figure 1).
One of the main takeaways from this proposition is that a low product variety cost (f ) – thus
high product variety (n) – plus a high product value (r/c) favor stocking for the high market size,
and hence may lead to overproduction. In fact, high product variety exacerbates the overproduction
problem, which is endemic in fashion industry. We however note that although overproduction is
certainly wasteful, it is not the only problem from an environmental perspective. To assess the
environmental impact of a production system one needs to consider the entire product lifecycle
including production, use and disposal, which we do when we study the MP firm’s environmental
impact (and compare it to that of the hybrid firm) in §5.
4. The Hybrid Firm

In this section we augment our model of the MP firm (§3) with MC technology, as we are interested
in whether adopting MC offers this firm a path to a more sustainable business. Adoption of MC
has been advocated as a way for the fashion industry to move to a more sustainable future (Ellen
MacArthur Foundation (2017), The Business of Fashion and McKinsey (2019)); we want to put this
advocacy to test. We assume that the firm now possesses an MC technology and can potentially
offer mass-customized products also – along with mass-produced products – although it does not
have to (adoption decision itself is endogenous). We call this “enhanced” firm the hybrid firm,

13
which represents the future of the MP firm if and when it adopts MC. Our research design is
consistent with the state of fashion industry (and other industries where MC is taking root): MP is
the status quo, there is considerable interest in MC, and it is unlikely that MC would fully replace
MP any time soon – if ever.
4.1. Hybrid Model

The MC technology makes it possible for the firm to produce any consumer’s ideal product on
demand. Thus, the disutility that stems from the mismatch between a consumer’s ideal product
and a mass-produced product vanishes if the consumer’s ideal product is offered via MC and she
opts to buy it. Moreover, no stocking decision is required for mass-customized products because
their production happens on a make-to-order (MTO) basis after the realization of the market size
M . (In Appendix C, we extend our base model to an MTS-MTO model with postponement, where
a stocking decision for generic units is made before M realizes, and customization of generic units
occurs on demand after M realizes.) We note that some degree of MTO is considered a fundamental
feature of MC, as reflected in existing analytical models (e.g., Alptekinoğlu and Corbett 2010,
Mendelson and Parlaktürk 2008) and refer the reader to a review paper on MTS-MTO hybrid
production models (Peeters and van Ooijen 2020).
The utility a consumer with ideal product θ derives from a mass-customized product θ (if avail-
able) priced at pM C is
UM C (θ, pM C ) = r − w − pM C , θ ∈ Θ,
where w is the disutility of delay (or, cost of waiting) associated with the MTO delivery of the
mass-customized product. Delivery leadtime is often a significant barrier to making MC succeed
(Alptekinoğlu and Corbett 2010, Xia and Rajagopalan 2009). For simplicity, we abstract away
from congestion effects (leadtime might depend on volume and timing of orders) and consumer
heterogeneity (in disutility per unit of leadtime).
In this augmented model, consumers can potentially choose from among mass-produced products
with utility UM P (defined earlier) and mass-customized products with utility UM C (defined above)
as well as the outside option. Demand uncertainty, which stems from the uncertain market size,
still matters because the mass-produced products are still made to stock.
Besides the decisions the MP firm makes, the hybrid firm makes another pricing decision: a
price pM C for mass-customized products. Which products to mass customize is also a decision, but
a trivial one; it is optimal for the firm to offer mass-customized products in all portions of the
product space not covered by the mass-produced products (we show this in Lemma 2).
Let λM P denote (as before) the market share of each mass-produced product, and λM C the total
market share of all mass-customized products. These market shares are driven by the consumer

14
choice model detailed above and they must satisfy nλM P + λM C ≤ 1. The hybrid firm’s objective
is to maximize its expected profit,
Π′ (n, pM P , qM P , pM C ) = pM P nE[min{qM P , M λM P }] + pM C µλM C − (cnqM P + cµλM C + f n2 )

| {z } | {z }
Hybrid firm’s total revenue Hybrid firm’s total cost
where the expectation is taken with respect to the market size M . For simplicity, we assume the
unit costs of mass-produced and mass-customized products to be the same and independent of
production volume. (We relax the former assumption in Appendix D, where we assume MC has a
higher unit cost.) This lets us focus on other factors, such as fixed cost of mass-produced product
variety, influencing the impact of MC. Also, we reiterate that quadratic variety cost allows a
meaningful hybrid solution to occur, where the firm sells both mass-produced and mass-customized
products. We note that a linear variety cost, for example, would result in a pure-MP or pure-MC
solution; that is, a hybrid solution would not be optimal.
4.2. Hybrid Analysis

In this section, we analyze the hybrid firm’s decisions. We assume that w is sufficiently high to
eliminate a pure MC solution (i.e., w > c(β − 1)(1 − α)/(αβ)). When this condition is violated, the
delay for mass-customized products is so low that MP does not make economic sense and mass-
customized products cover the entire market. We impose this condition because in fashion industry
MP is the norm and it is far more plausible that an MP firm would incorporate MC without
completely abandoning MP. We also assume that w is not so high that MC is surely unprofitable
(i.e., w < r − c).
We first present some preliminary analysis, which helps us construct the hybrid firm’s solution
(an analog of Proposition 1). The following lemma shows the firm’s optimal pricing and production
policy for mass-customized products.
Lemma 2. For any given market share per mass-produced product, λM P , it is optimal for the
hybrid firm to cover the entire market, and set the price and total production quantity of mass-
customized products as follows:
(
λ M C mH M = mH ,
p∗M C = r − w, ∗
qM C =
λ M C mL M = mL .
where λM C = 1 − nλM P is the total market share of mass-customized products.
The lemma reveals two features of the optimal solution: The hybrid firm charges the highest
price possible for mass-customized products (hence, consumers receive zero utility from them), and
produces the exact amount needed to satisfy the demand for them. Because these are true for any
λM P , they are true for the hybrid firm’s globally optimal solution. Recall that the market is not

15
necessarily fully covered in the optimal MP solution (as in Hu and Lu solutions). The hybrid firm,
on the other hand, uses MC to fill in the “gaps” between the mass-produced products it chooses
to offer in its optimal solution, which may be different from the ones the MP firm offers. This is
because, the firm can always produce via MC the ideal products of those consumers who happen to
fall in these “gaps” (i.e., those who are located too far from a mass-produced product). That is, the
firm can always charge a profitable price for a mass-customized product and leave no one unserved,
a standard result in the literature (e.g., Alptekinoğlu and Corbett 2008, Huang et al. 2018). This
result also suggests that MC may increase overall production. Therefore, its environmental impact
cannot be taken for granted and should be scrutinized, which we do in §5.
To be able to state the overall solution for the hybrid firm, we first define the following solution
.
types, analogous to the ones defined for the MP firm. Let λ′H = w − c(β − 1)(1 − α)/(αβ) /t and
. .
λ′L = wβ − (r − c)(β − 1) /t, where β = µ/mL .
µtλ′2

.
H′u = n∗ = H
, λ∗M P = λ′H , qM ∗
P = λ ′
H m H , λ ∗
MC = 1 − n∗ ′
λ H , (6)
4f
r
′ . ∗ 3
tµ ∗ 1 ∗ mH ∗
Hc = n = , λM P = ∗ , qM P = ∗ , λM C = 0 , (7)
4f n n
mL tλ′2

.
L′u = n∗ = L
, λ∗M P = λ′L , qM ∗
P = λ ′
m
L L , λ ∗
MC = 1 − n ∗ ′
λ L , (8)
4f
r
′ . ∗ 3
tmL ∗ 1 ∗ mL ∗
Lc = n = , λM P = ∗ , qM P = ∗ , λM C = 0 , (9)
4f n n
where p∗M C and qM

∗
C are omitted because Lemma 2 applies to all four solution types, and recall
that p∗M P is implied by λ∗M P as stated in (1). The solution types H′u and L′u represent a hybrid
strategy, in which both MP and MC take place simultaneously. Note that H′u is similar to Hu ,
and L′u to Lu , in the sense that a part of the market is served with mass-produced products and
the stocking quantity for each of those products is set for a certain market size. Note also that
H′c is identical to Hc , and L′c to Lc , because in all these cases the market is entirely covered by
mass-produced products (of course, even though the outcome is the same between H′c and Hc , and
between L′c and Lc , they may represent different regions in the parameter space).
We are now ready to state the solution to the hybrid firm’s problem. (The thresholds are all
defined in the proof.)
stocking decisions of the hybrid firm.
(a) H′u when f > fH′ ; or
(b) H′c when f ≤ fH′ .

16
14 000 14 000
12 000 12 000
10 000 10 000
8000 8000
6000 6000
4000 4000
2000 2000
0 0
11 12 13 14 15 11 12 13 14 15
(a) (b)
Figure 2 Example solutions to the hybrid firm’s problem for (a) w = 6 and (b) w = 5.5, where dashed lines
separate low-, moderate- and high-value product cases. (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5).

(a) L′u when w > w1 and f > fL′ ;
(b) L′c when w > w1 and fL′ ≥ f ≥ fcu
′
;
(c) H′u when w ≤ w1 and f > fH′ , or w > w1 and fcu
′
> f > fH′ ; or
(d) H′c when f ≤ fH′ .
(a) L′u when w > w1 and f > fL′ ;
(b) L′c when w1 < w < w2 and fL′ ≥ f ≥ fcu
′
, or w ≥ w2 and fL′ ≥ f ≥ fc ;
(c) H′u when w ≤ w1 and f > fH′ , or w1 < w < w2 and fcu
′
> f > fH′ ; or
(d) H′c when w < w2 and f ≤ fH′ , or w ≥ w2 and f ≤ fc .
Note that the thresholds on r/c that define the high-, moderate- and low-value products are
the same as in the MP firm’s solution (§3.2). There we show the solution depends on two factors:
product value (r/c) and product variety cost (f ). When the MP firm expands into MC, in addition
to these factors, consumer waiting cost (w) also becomes crucial. Figure 2 depicts the hybrid
solution for two distinct values of w. Now, along with high product value and low product variety
cost, low waiting cost also leads the firm to stock for the high market size, i.e., the solution H′ .
The most interesting aspect of the hybrid solution occurs as w goes down, that is, as MC
becomes more convenient. For sufficiently low w and sufficiently high f , the hybrid firm stocks
mass-produced products for the high market size (H′u ) regardless of product value (in all three parts
of Proposition 2). This is not true in the MP solution, because in that case the firm stocks low-
and moderate-value products for the low market size (Lu and Lc ) when f is sufficiently high (see
parts 2 and 3 of Proposition 1). That is, Lu and Lc can be replaced by H′u when we allow MC (as
is apparent from comparing Figure 1 with Figure 2), which leads to an increase in overproduction.

17
This reveals an intriguing phenomenon: Counter to common intuition, MC can increase expected
overproduction, which we define as the leftover inventory after meeting the demand (the standard
way to think about it). MC has been touted for its ability to perfectly match the demand and thus
reduce overproduction. We show that this view overlooks how it affects the stocking quantity for
mass-produced products in a hybrid system. In particular, MC decreases the total market the firm
serves with MP, i.e., n∗ λ∗M P goes down. With mass-produced products each capturing a smaller
market share, the firm is able to charge more for them and take more risk by stocking for the high
market size mH , increasing the expected overproduction for low- and moderate-value products in
the process. We note, however, that higher overproduction may not directly imply higher total
environmental impact. One still needs to consider the environmental impact of different product
lifecycle phases (see §5). We also note in closing that this fundamental insight holds for varying
levels of postponement too (see Appendix C.2 for details, Corollary 2 in particular).
5. Environmental Impact Comparison

In this section we compare the MP solution with the hybrid solution – which are both profit-
maximizing solutions – in terms of their environmental impact. This analysis lets us identify when
adopting MC leads to a win-win outcome – good for both profitability and sustainability. It also
lets us explore the market conditions under which well-meaning MC initiatives can lead to worse
environmental outcomes. The resulting insights, driven by the firm’s profit motive, feed into the
policy analyses we conduct in the next section.
To model the environmental impact, we consider four different phases of product lifecycle: pro-
duction, use, disposal and overproduction. We use ep , eu , ed and eo to denote per-unit environmental
impact (in kg CO2 -eq) of the four lifecycle phases, respectively. The previous literature mainly
focuses on the first three lifecycle phases (Atasu and Souza 2013, Örsdemir et al. 2014), because
demand is typically assumed to be deterministic. In our model, the market size, hence the demand,
is random; thus, we need to account for overproduction as well. The overproduction coefficient eo
is a parameter that captures the environmental impact of overproduced units – inventory in excess
of demand – that can occur for mass-produced products in our MP and hybrid models. These
may be burned, recycled, donated, etc., and can be a large component of the firm’s environmental
footprint, as is the case for many fashion companies.
. .
We define Es = ep + eu + ed as per-unit environmental impact of sold clothing, and El = ep + eo as
per-unit environmental impact of unsold or leftover clothing. The expected environmental impact
by the MP firm for the four solution types defined in (2)-(5) can thus be expressed as E[IHu ] =
Es µn∗ λH + El (mH − µ)n∗ λH , E[IHc ] = Es µ + El (mH − µ), E[ILu ] = Es mL n∗ λL , and E[ILc ] = Es mL .
Similarly, the expected environmental impact by the hybrid firm for the four solution types defined

18
14 000 14 000
12 000 12 000
10 000 10 000
8000 8000
6000 6000
4000 4000
2000 2000
0 0
11 12 13 14 15 11 12 13 14 15
(a) MP Firm (b) Hybrid Firm

Figure 3 When adopting MC leads to a win-win or win-lose: Superimposed on the different MP and hybrid
firm solutions separated by solid lines, light green (light red) regions represent win-win (win-lose). In gray regions,
the MP and hybrid firms operate the same. Dashed lines separate low-, moderate- and high-value product cases.
(α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4)
in (6)-(9) can be expressed as E[IH′u ] = Es µ + El (mH − µ)n∗ λ′H , E[IH′c ] = Es µ + El (mH − µ), E[IL′u ] =
Es [mL n∗ λ′L + µ(1 − n∗ λ′L )], and E[IL′c ] = Es mL .
We analytically compare the environmental impacts of the MP firm and the hybrid firm in
the regions where hybrid production occurs (i.e., the hybrid firm offers both mass-produced and
mass-customized products). Note that when hybrid production does not occur, the environmental
impact is equivalent, hence uninteresting. It is also worth noting that in the regions of interest the
hybrid firm achieves higher profit than the MP firm, simply because the MP model is a special
case of the hybrid model. This implies that the result below, by characterizing when the hybrid
firm is environmentally superior, is also a precise statement of when adopting MC is a win-win
affair. (The thresholds are all defined in the proof.)
Proposition 3. The following cases fully characterize when adopting MC is a win-win outcome
for both firm profitability and environmental impact.
1. The firm offers a high-value product, defined by r/c ≥ κ2 , and
(a) f > fH and El /Es > R, or
(b) fH ≥ f > fH′ .
2. The firm offers a moderate-value product, defined by κ1 ≤ r/c < κ2 , and
(a) fcu > f > fH and El /Es > R and El /Es > R, or
(b) fH ≥ f > fH′ .
3. The firm offers a low-value product, defined by r/c < κ1 , and fc > f > fH′ and w ≤ w2 .
Roughly speaking, higher product value (r/c), higher product variety cost parameter (f ), lower
waiting cost (w), and higher environmental impact by leftover units relative to sold units (El /Es )

19
favor a win-win outcome. (Note that the threshold R is increasing in w, which implies that the
condition El /Es > R is easier to meet with lower w.) To develop a more precise intuition on why,
consider Figure 3, where we show the MP and hybrid solutions side-by-side and indicate when
win-win outcomes occur (for a realistic set of parameters, all described in Appendix B).
For a win-win outcome, it is necessary that H′u , the hybrid production solution for the high market
size, replace Hu or Hc , the MP firm’s solutions for the high market size (see Propositions 1 and 2
for analytical characterizations of these solution types). MC is considered environmentally superior
due to its ability to eliminate overproduction via its MTO operation. Indeed, when it replaces
MP at least partially in Hu or Hc , where overproduction is problematic, it can be environmentally
superior. However, this is not a sufficient condition; as shown in §4.2, adopting MC can encourage
production of mass-produced items for the high market size, and may lead to overproduction and
higher sales, both of which are captured by our environmental impact metric.
For high-value products, such as those produced by Ermenegildo Zegna, the conditions in 1(a)
describe the region in which the solution is Hu for the MP firm and H′u for the hybrid firm. Recall
that the market is not covered in Hu , but it is in H′u ; that is, going hybrid increases the total
expected sales. But it also decreases overproduction, because the portion of the market served with
mass-produced products (i.e., n∗ λ∗M P ) shrinks. As long as the former negative effect is weaker than
the latter positive effect, which happens when El /Es is sufficiently large, going hybrid improves
(reduces) the environmental impact. The condition in 1(b) describes the region in which the solution
is Hc for the MP firm and H′u for the hybrid firm. Therefore, both firms produce for the high
market size and fully cover the market, yet the hybrid firm replaces some of the mass-produced
products with mass-customized products and reduces the overproduction as a result.
The comparison for moderate-value products, such as those produced by Zara and H&M, is
similar to high-value products except that the hybrid firm can never be environmentally friendly
when product variety cost is high, i.e., f ≥ fcu . That is, MC can backfire in that case. The reason
is the MP firm producing for the low market size (solutions Lu or Lc ), which is the best outcome
from an environmental point of view. In these regions, when the firm goes hybrid, the solution
changes to either L′u or H′u , meaning an increase in expected sales. Not only that, overproduction
also increases if the solution changes to H′u . As a result, the hybrid firm becomes environmentally
inferior for sure. In the remaining possibilities the intuition is similar to the high-value-product
case. In particular, the hybrid firm replaces Hu with H′u when fcu > f > fH , and Hc with H′u when
fH ≥ f > fH′ , akin to parts (a) and (b) of high-value-product case, respectively.
Finally, for low-value products, in order for the hybrid firm to be environmentally superior,
product variety cost parameter must be moderate, i.e., fc > f > fH′ , similar to moderate-value
products. Additionally, the waiting cost w must be sufficiently small (w < w2 ). Essentially, in this

20
region, the solution switches from Hc under MP to H′u under hybrid, reducing the overproduction
and, along with it, the overall environmental impact. Note that, similar to the moderate-value-
product case, beyond a certain product variety cost (i.e., if f ≥ fc ) adopting MC again backfires:
Hybrid becomes environmentally inferior to MP.
In sum, this section identifies win-win opportunities that adopting MC brings. Proposition 3
analytically characterizes when the hybrid firm is environmentally superior to and more profitable
than the MP firm. It also teaches us when the firm worsens its environmental impact by going
hybrid. The fact that MC may increase overproduction is particularly interesting, because MC
has been touted for its ability to match demand. Yet, its interaction with MP in the hybrid
system produces this counterintuitive finding. In fact, the following result is a direct implication
of Proposition 3:
Corollary 1. If the hybrid firm has higher overproduction than the MP firm, then its environ-
mental impact is also higher.
In its pure form, MC obviously eliminates overproduction altogether. But we find the hybrid
system more germane to the conversation, because a hybrid future appears more plausible than a
pure MC future in industries where MC is taking hold.
6. Policy Insights
In this section, we investigate real policy ideas proposed or employed to curb the colossal negative
environmental impact of fashion industry, and apply them to our MC context. In §6.1, we consider
actions that promote MC over MP – as a matter of government policy or NGO consumer awareness
campaigns. In §6.2, we investigate an interventionist policy idea that is taking root these days:
governments charging a disposal fee for unsold clothing. In §6.3, we analyze the impact of firms
taking back and recycling used and unsold clothing, which is an emerging practice. With all these
policy ideas, we are interested in two basic questions. First, what is the impact on win-win or
win-lose outcomes? Win-win becoming more likely under a policy, in the sense of occurring for a
larger set of model parameters, would render the adoption of MC more desirable for more firms
not only from a profitability perspective but also from an environmental impact perspective. A
shift toward more win-lose outcomes, on the other hand, would mean higher adoption of MC at the
expense of the environment. Second, how does the environmental impact of a hybrid firm change
due to a policy intervention? This is to understand, after the MC adoption occurs, how policy can
influence the firm’s economic incentives and the resulting impact on the environment.

21

Figure 4 Impact of promoting MC on win-win (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 5.5,
Es = 5.5, El = 4)
6.1. The impact of promoting mass customization

To help address fashion’s sustainability problem, several recent industry reports (Ellen MacArthur
Foundation 2017, The Business of Fashion and McKinsey 2019, Boston Consulting Group 2019)
and a popular book (Thomas 2019) promote MC. These publications increase consumer awareness
about the notion that MC may provide an environmentally friendly way to consume fashion, which
might increase consumers’ tolerance for waiting for a mass-customized fashion product (i.e., lower
their waiting cost w).
We first answer the question of whether a policy that aims at reducing w expands the parameter
region where win-win occurs, which we henceforth call the win-win region.
Proposition 4. As w decreases as a result of promoting MC, the win-win region expands, and
the win-lose region shrinks.
This is encouraging from a policy perspective, because reducing w by increasing consumers’

tolerance for waiting for bespoke fashion unambiguously increases the chances of MC adoption and
helps the environment in the process. See Figure 4 for an illustration of the result, where light
green regions represent win-win for w = 5.5. In comparison with Figure 3, which assumes a higher
waiting cost (w = 6), the win-win region expands as indicated by green arrows.
Expansion of the win-win region occurs in one of two ways: the hybrid firm’s H′u solution replacing
the MP firm’s Hc solution for more low f values; or, H′u replacing Hu for more high f values. In
both cases, overproduction drops. In the latter case, sales increases, but its negative environmental
effect is overtaken by the positive effect of the drop in overproduction. Note that the MP solutions
separated by solid lines in Figure 4(a) do not change, because w does not feature in them at all.
We now take up another interesting question: How would a lower w – as consumers grow more
tolerant of waiting for mass-customized products – alter the environmental impact of the hybrid

22
firm. (Thresholds w1 and w2 are given in the proof of Proposition 2, and ft is a piecewise function
of w characterized in the proof of Proposition 5.)
Proposition 5. As w decreases, the hybrid firm’s environmental impact changes as follows:

1. For high-value products, characterized by r/c ≥ κ2 , the hybrid firm’s environmental impact
decreases (strictly so in some cases).
2. For low- and moderate-value products, characterized by r/c < κ1 and κ1 ≤ r/c < κ2 , respec-
tively, the hybrid firm’s environmental impact decreases (strictly so in some cases) if and only
if w ≤ w1 , or w > w1 and f < ft .
The proposition shows it is not a given that consumers buying into the environmental friendliness
of MC necessarily leads to an environmentally superior outcome for the hybrid firm. This does not
contradict Proposition 4, because the expansion of win-win never encroaches on the region where
the hybrid firm’s impact may increase (solutions L′u and L′c , discussed below).
For high-value products, we know that the solution can be either H′u or H′c . In these regions, as w
decreases, overproduction may decrease because either (i) the solution is H′u and it stays H′u with
mass-customized products replacing some mass-produced products, or (ii) the solution is H′c and
it changes to H′u . So, for high-value products, promoting MC is always environmentally beneficial.
The above is also true for moderate- and low-value products as long as the solution is H′u or H′c .
(The conditions in the proposition essentially characterize when the solution is one of these.) On
the other hand, when the solution is either L′u or L′c , any reduction in w may be detrimental to the
environment, because it may increase the total production quantity and even the overproduction.
This is because mass-customized products, whose expected production quantity is µ, would replace
some mass-produced products, whose production quantity is mL (both quantities are in per unit
distance of the market covered by either type of product). Plus, the solution may also change
from L to H, from producing the mass-produced products for the low market size to producing
them for the high market size, which leads to overproduction and introduces a discontinuity in
environmental impact. Both of these effects as w drops – gradual increase in production and the
jump in production (hence, overproduction) – are shown in Figure 5 for a low-value product (the
picture would be similar for a moderate-value product). The hybrid firm solution changing from L
to H is also apparent in Figure 2.
In sum, promoting MC to achieve a lower w leads to increased adoption of MC (higher profits
for firms) accompanied with reduced environmental impact, because it unambigously expands the
win-win region. Still, NGOs should take care in promoting MC as a sustainable alternative. It is
possible that such actions may alter how a hybrid firm, capable of both MP and MC, designs its
product line and sets its production quantity in a way that might eventually hurt the environment.
Promoting MC always benefits the environment for high-value products, however, it is beneficial
for moderate- and low-value products if either w is already small, or w is large but f is small.

23
3.2 × 105
3.1 × 105
3. × 105
2.9 × 105
2.8 × 105
2.7 × 105
2.6 × 105
2.5 × 105
5.0 5.2 5.4 5.6 5.8 6.0
Figure 5 Non-monotone impact of w on the hybrid firm’s environmental impact (α = 0.5, mH = 87500,
mL = 25000, t = 16.87, c = 5, w = 6, f = 10000, r = 11.5, El = 4, Es = 5.5)
6.2. The impact of disposal fee for overproduction

In the wake of Burberry controversy, French and British governments have been on a path to
implement a policy that would penalize dumping of unsold clothing (Karasz 2019, Moore 2019,
Templeton 2022). In this subsection, we investigate possible outcomes of such policies. To do so, we
assume the government charges a disposal fee x for each unit of excess or unsold inventory. Note
that the introduction of this policy does not alter the solution if the firm stocks mass-produced
products for the low market size when the policy is not in place. That is, the policy penalizes only
overproduction, which does not occur in solution types L and L′ .
The profit function for the MP and hybrid firms, respectively, under the disposal fee policy is
Π(n, pM P , qM P ) = pM P nE[min{qM P , M λM P }] − cnqM P − xnE[max{qM P − M λM P , 0}] −f n2 ,

| {z }
Total disposal fee
Π′ (n, pM P , qM P , pM C ) = Π(n, pM P , qM P ) + (pM C − c)µλM C
We first answer the question of whether a policy that directly and financially penalizes overpro-
duction expands or shrinks the parameter region where win-win occurs.
Proposition 6. Suppose there is a disposal fee x per unit of overproduction. As x increases,

the win-win region expands to parameter values for which the hybrid firm’s H′u solution replaces the
MP firm’s Hc solution, but shrinks from parameter values for which the hybrid firm’s H′u solution
replaces the MP firm’s Lc , Lu or Hu solutions.
This is mixed news from a policy perspective. See Figure 6 for an illustration of the result, where
light green regions represent win-win for x = 0.26 (Appendix B.5 explains how we arrived at this
estimate). In contrast with Figure 3, which assumes no penalty for overproduction (x = 0), the
win-win region expands in certain areas (as indicated by green arrows) and shrinks in others (as

24

Figure 6 Impact of disposal fee for overproduction on win-win (α = 0.5, mH = 87500, mL = 25000, t = 16.87,
c = 5, w = 6, Es = 5.5, El = 4, x = 0.26)
indicated by red arrows). Increasing x further, the light red regions representing win-lose eventually
takes over the entire graph.
The main reason for the expansion of win-win into low f values is that the hybrid firm has more
economic incentive to use MC to avoid overproduction, which results in H′u expanding to more
parameter values for which it replaces Hc . Yet this also helps the environment, because Hc results
in the same expected sales but higher overproduction compared to H′u . On the other hand, the
contraction of win-win occurs, because for moderate-to-high f values where the hybrid firm wants
to use H′u , the MP firm’s incentive to use Lc , Lu or Hu increases. But that hurts the environment,
because the hybrid firm sells more units in expectation and takes a calculated overproduction risk
in the limited market segments that it serves using MP products.
Overall, the win-win region tends to shrink as x increases, which is intuitive. In fact, for a
sufficiently high disposal fee, x > (αr − c)/(1 − α), adoption of MC can never lead to a win-win.
In this case both the hybrid firm and the MP firm produce for the low market size – to avoid
overproduction altogether. For the hybrid firm though, L′u completely replaces Lu and partially
takes over Lc . Both changes are clearly detrimental to the environment since they increase sales.
We now take up the question: How would a disposal fee policy alter the environmental impact
of the hybrid firm.
Proposition 7. For the hybrid firm, a disposal fee policy always benefits the environment
(strictly so in some cases).
Recall that the hybrid firm always covers the market. It can be shown that, as a result of a
disposal fee policy, the hybrid firm’s H′u and H′c solutions shrink and are taken over by L′u or L′c .
Expansion of L′u or L′c in turn decreases the expected sales as well as overproduction, both of which
benefit the environment.

25
In sum, a disposal fee policy expands the win-win region only when the mass-produced variety
is sufficiently cheap (f is low). Otherwise, there are cases where it may result in a win-lose, which
translates to increased MC adoption that would result in a higher environmental impact. An
excessive penalty on disposal actually leads to no win-win. Governments should thus be cautious
while enacting disposal fee laws directed at the fashion industry. For a firm that has already adopted
MC, however, imposition of a disposal fee always helps reduce its environmental impact.
6.3. The impact of recycling

Recycling is an emerging practice in fashion industry. For example, H&M re-launched its “Bring
it on!” campaign in 2017. Eileen Fisher launched its “Vision 2020” initiative, in which recycling
has been a central element. In this section, we analyze how recycling changes the environmental
outcomes. To that end, we assume in both models that the firm recycles all of its unsold clothing
– thus, the entire overproduction – and τ fraction of its sold clothing. The parameter, τ ∈ [0, 1],
represents the rate of take-back or recycling among consumers.
We also assume that for each recycled unit the firm incurs an incremental financial cost or
benefit s. We consider recycling to be costly if s ≤ 0, and profitable if s > 0, while imposing the
condition |s| < c, which puts a natural limit to the magnitude of its incremental financial impact.
As is common in take-back literature, we use a single-period model (Atasu et al. 2009, Esenduran
et al. 2017, Örsdemir et al. 2014). The single period can be interpreted as the products’ maturity
stage in which prices and quantities are steady.
The MP and hybrid firms’ profit functions under the recycling policy are:
Π(n, pM P , qM P ) = [pM P − (1 − τ )s]nE[min{qM P , M λM P }] − (c − s)nqM P − f n2 ,
Π′ (n, pM P , qM P , pM C ) = Π(n, pM P , qM P ) + (pM C − c)µλM C + sτ µλM C .
We presume recycling reduces the environmental impact of sold and leftover units. Akin to §5,
.
we define the following environmental impact coefficients: eτp , eτu , eτd and eτo , and Esτ = eτp + eτu + eτd
.
and Elτ = eτp + eτo . We assume that recycling does not affect use (eτu = eu ), and that it might reduce
the impact of production (eτp ≤ ep ) and reduces the impacts of disposal and overproduction (eτd < ed
and eτo < eo ), implying that Esτ < Es and Elτ < El . Similar assumptions have been made in the
literature (Atasu and Souza 2013, Örsdemir et al. 2014).
6.3.1. Profitable Recycling We first investigate the question of whether the win-win region
expands or not in the case of profitable recycling with s > 0. Any economically viable way to reuse
recycled fibers, such as turning them into wash-clothes, would be an example.

26

Figure 7 Impact of profitable recycling on win-win (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6,
Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = 0.5)
Proposition 8. Suppose recycling is profitable for the firm (s > 0). As it becomes more prof-
itable (as s > 0 increases), the win-win region expands to parameter values for which the hybrid
firm’s H′u solution replaces the MP firm’s Lc , Lu or Hu solutions, but shrinks from parameter values
for which the hybrid firm’s H′u solution replaces the MP firm’s Hc solution.
See Figure 7 for an illustration of the result, where light green regions represent win-win for
s = 0.5 and τ = 0.15 (Appendix B.5 explains how we arrived at these estimates). In comparison with
Figure 3, which assumes no recycling, the win-win region expands in certain areas (as indicated
by green arrows) and shrink in others (as indicated by red arrows). Increasing s further, the light
green regions representing win-win eventually takes over the light red regions.
The win-win region expands for moderate-to-high f values, because the hybrid firm is willing to
use recycling as a way to deal with higher sales and overproduction generated by using H′u over
the MP firm’s Hu , Lu and Lc solutions for more parameter values. The contraction of the win-win
region for low f values, on the other hand, occurs because profitable recycling gives incentive for
the hybrid firm to use H′c , which involves more recycling, rather than H′u .
We now explore the impact of recycling for the hybrid firm. On the one hand, the hybrid firm
financially benefits from more recycling, thus wants a higher production quantity, everything else
equal, which is detrimental to the environment. On the other hand, recycling has a positive effect;
it decreases the impact of sold units (Esτ < Es ) and leftover units (Elτ < El ). Hence, a trade-off
arises that leads to the following proposition. We use Qτs and Qτl (Qs and Ql ), respectively, to
denote the total quantity of sold and leftover units when recycling is (is not) carried out.
Proposition 9. Running a profitable recycling program (s > 0) decreases the hybrid firm’s envi-
ronmental impact if and only if (i) the solution without recycling is H′c , or (ii) it is L′c and s < st ,
or (iii) Esτ Qτs + Elτ Qτl < Es Qs + El Ql in all other cases.

27

Figure 8 Impact of costly recycling on win-win (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6,
Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = −0.5)
For hybrid firm solutions where recycling does not change the total production quantity (hence,
sold and unsold product quantities, as in H′c or L′c ), recycling improves the environmental impact,
because the environmental impact of these units decrease (Esτ < Es and Elτ < El ). The condition
on s in part (ii) keeps the solution as L′c . In all other regions, the trade off is not as clear cut.
This is because recycling increases the quantity of sold or unsold products, and sometimes both.
Therefore, it can only be “good” if per unit environmental impacts of sold and unsold products
sufficiently decrease due to recycling, which is captured in part (iii) of the proposition. We can
further simplify this inequality down to model primitives, but this would not provide any further
insights, so we leave it as is.
6.3.2. Costly Recycling We now look at the case with s ≤ 0, which implies the firm has no
economic incentive to recycle unless there is a government mandate to do so. Therefore, we assume
that recycling is mandated by law. Given the increased scrutiny the fashion industry receives due
its environmental impact, a government mandate may not be in a distant future (Zha 2019).
Proposition 10. Suppose recycling is costly for the firm (s ≤ 0). As it becomes more costly (as
s ≤ 0 decreases), the win-win region expands to parameter values for which the hybrid firm’s H′u
solution replaces the MP firm’s Hc solution, but shrinks from parameter values for which the hybrid
firm’s H′u solution replaces the MP firm’s Lc , Lu or Hu solutions.
See Figure 8 for an illustration of the result for s = −0.5. Comparing with Figure 3, which assumes
no recycling, the win-win region expands in certain areas (as indicated by green arrows) and shrink
in others (as indicated by red arrows). The intuition is basically the opposite of what occurred in the
case of profitable recycling. Overall, the win-win region tends to shrink as recycling becomes more
costly, which is intuitive. In fact, for a sufficiently high recycling cost, s < −(αr − c)/(1 − α(1 − τ )),

28
adoption of MC can never lead to a win-win. In this case both the hybrid firm and the MP firm
produce for the low market size – to counter high recycling costs. The intuition is similar to the
case of high disposal fee: for the hybrid firm, L′u completely replaces Lu and partially takes over
Lc ; both changes are detrimental to the environment.
Proposition 11. Running a costly recycling program (s ≤ 0) always reduces the hybrid firm’s
environmental impact.
Contrary to the profitable recycling case, when recycling is costly, imposing it on the firm is
always beneficial for the environment. In essence, costly recycling never increases sold or unsold
product quantities. So, combined with lower per unit environmental impact for sold and unsold
products, i.e., Elτ < El and Esτ < Es , recycling lowers the environmental impact for sure.
In closing, the impact of recycling policies on win-win is mixed, which recommends caution to
policy makers. Judging based on where win-win becomes more likely, profitable recycling is more
effective when f has moderate-to-high values, and costly recycling is more effective when f has low
values. Furthermore, not too surprisingly, costly recycling induces more environmentally friendly
incentives on the hybrid firm than profitable recycling. Even in the latter case though, recycling
can reduce the hybrid firm’s environmental impact. Recall that we need Esτ < Es and Elτ < El
for our recycling policy results to hold. One of the most plausible ways this may happen is a
decline in per-unit environmental impact of disposal and overproduction (eτd < ed and eτo < eo ) due
to recycling or recovery actions. Our analysis is agnostic to how exactly this happens – via new
business models, new technologies (e.g., Evrnu), or any other means.
7. Concluding Remarks
Our central research question in this paper is whether a firm’s move from a pure MP system to
a hybrid system with MP and MC capabilities can be a win-win for both firm profitability and
environmental sustainability. Fashion industry provides a great motivation and backdrop for this
question: Not only are fashion companies making moves toward MC, but also they are making such
moves with sustainability motives. We first build an analytical model to characterize the firm’s
optimal variety, price, and inventory decisions under both MP and hybrid systems, and study the
firm’s environmental impact in those two scenarios. We then extend the analysis to understand the
impact of various policy levers on profitability and sustainability.
One of our most fundamental insights, and one that drives many of our other results, is that
MC can increase overproduction, complicating the calculus on environmental impact (captured
by LCA). This stems from the interaction of mass-produced and mass-customized products; the
firm’s optimal product line design in the hybrid case may shift to a profit-maximizing solution that
represents higher operational risk-taking (for mass-produced products).

29
We characterize when adopting MC is a win-win (Proposition 3). In our model this means the
firm going from MP to hybrid, and increasing its profit while decreasing its environmental impact
in the process. A win-win generally (not in all cases) requires the product variety cost not to be too
low or too high, the environmental impact of sold units not to be too high relative to unsold units,
and the waiting cost for mass-customized products not to be too high. A high product value also
generally favors a win-win. In contrast, there are cases when going hybrid hurts the environment
but not the bottom line – most notably when the product variety cost is too high, especially for
moderate- and low-value products. In such cases, not only expected sales but also overproduction
grows, which renders hybrid environmentally inferior.
Our policy results are also nuanced. Taking the perspective that expanding the win-win outcomes
would imply higher rate of sustainable MC adoption, we study how different policy options change
the set of parameters that lead to a win-win. Promoting MC to lower the consumers’ disutility
from waiting for mass-customized products always helps in this regard (Proposition 4), whereas
imposing a disposal fee on overproduction and running a recycling program – whether it be costly
or profitable – help only in certain scenarios (Propositions 6, 8 and 10). We also explore how the
hybrid firm’s environmental impact changes under these policies, essentially to understand the
post-MC-adoption incentives. Here, the disposal fee and costly recycling policies unambiguously
help (Propositions 7 and 11), whereas the other two policy options are mixed bags (Propositions
5 and 9), so they need to be designed carefully to avoid unintended consequences.
We hope these insights regarding three real policy options will help advance the discussion on
the environmental sustainability of MC in general and in fashion business in particular. As a way of
contributing to this discussion directly, we have shared our paper with Ellen MacArthur Foundation
(EMF), one of the NGOs that provided inspiration for our paper. Upon invitation by EMF’s Make
Fashion Circular initiative (formerly known as The New Textile Economy initiative), we then had
an opportunity to explain our policy findings and hold a broad discussion with them about MC
and circularity in fashion.
We believe this is a fertile area for further research, as there are many unknowns on how MC
would operate on a truly large scale and what that would mean for the environment. For example,
it might be good to know if our policy insights would hold for competing firms adopting MC.
Another topic of broad value would be the economic cost and environmental impact of product
variety. For example, in this paper we assume that the fixed cost for mass-produced variety is
quadratic in number of products, and the environmental impact is linear in quantity. Although
they have precedence in theory work, both relationships should be put to empirical scrutiny.

30
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a1
Online Appendix for “Is Adopting Mass Customization a Path to

Environmentally Sustainable Fashion?” by Alptekinoğlu and Örsdemir
This appendix contains the proofs of our analytical results in the main text, and model parameter
estimates based on fashion industry data, which we use in all our plots (numerical illustrations).
A. Proofs
Here we provide the proofs of our results in the main text. Table 2 characterizes various thresholds
used in Propositions 1-3.
Proof of Lemma 1: This can be shown using Lemma 3 in the proof of Proposition 2 by letting
w → r − c. □
Proof of Proposition 1: This can be shown from Proposition 2 by letting w → r − c. Additionally,
fi = limw→r−c fi′ , where i ∈ {H, L, cu}. fi ’s, fc , κ1 and κ2 are defined in the proof of Proposition 2
and Table 2. □
Proof of Lemma 2: MC allows the firm to sell consumers their ideal product. Therefore, the
firm can raise the price until UM C = 0, resulting in p∗M C = r − w. Suppose there is an unserved
consumer. The firm can increase its profit by selling this consumer her ideal product. Thus the
∗
market is covered and λM C = 1 − nλM P . qM C is equal to the demand for each product because the
production takes place after demand realization in MC. □

Proof of Proposition 2: We define the expressions w1 , w2 , κ1 , κ2 , fc , fi′ , where i ∈ {H, L, cu} in
. . .
this proposition (also see Table 2). First, let λt = (r − c/α)2/t, λ′L = (wβ − (r − c)(β − 1))/t, λ′H =
.
w − (c(β − 1)(1 − α))/(αβ) /t, where β = µ/mL .
The MP products must be located such that the market segment captured by each product is
of equal length and also the distance between them is the same because MP product prices are
uniform (Alptekinoğlu and Corbett 2008). The firm’s expected profit is
Π′ (n, pM P , qM P , pM C ) = pM P nE[min{qM P , M λM P }] + pM C µλM C − (cnqM P + cµλM C + f n2 ) .

| {z } | {z }
Hybrid firm’s total revenue Hybrid firm’s total cost
Threshold Definition
λ3
H µt λ′3 µt λ3 m t λ′3 m t
fH , fH′ , fL , fL′ 4
, H4 , L 4 L , L 4 L
1/3 λ4H µβt ′ 1/3 λ′4 µβt
′
fcu , fcu unique solutions to λL = 32 2mfL t + 16f , λL = 32 2mfL t + H16f ,
3
2 β−1
fc 27 β 2/3 −1
λ3t mL t
√ √ √
α(β+ β )r−c(α(β−1)+ β+1) (β 2/3 + 3 β+1)(β 2/3 (4αr−3αc−c)−3(1−α)c)
w1 , w2 αβ
, √
3α( 3 β+1)β
√3 2/3 4/3 √
3−3(α−1) β−3α+4β +β +β 1−α+ β
κ1 , κ2 √
α(β 2/3 + 3 β+4)β 2/3
, α√β
(1−nH λH )µ
R (mH −µ)(nH λH −n′H λ′H )
Table 2 Definition of various thresholds used in Propositions 1-3.

a2
Therefore,

2
pM P µnλM P + (pM C − c)λM C µ − cnq − n f
 q > λM P mH ,
Π′ (q) = pM P (αq + (1 − α)λM P mL )n + (pM C − c)λM C µ − cnq − n2 f λM P mL ≤ q < λM P mH ,
2

M C − c)λM C µ − cnq − n f
p qn + (p q < λM P mL .
MP
At the optimal price p∗M P , we have
r − tλM P /2 = p∗M P , (10)
implying there is a one to one correspondence between the product price and the length of the
served market. We can use this to obtain the profit as a function of λM P . We now state and prove
the following lemma.
Lemma 3. If λM P < λt , then q ∗ (λM P ) = λM P mH . Otherwise, if λM P ≥ λt , q ∗ (λM P ) = λM P mL .
Proof of Lemma 3: The function Π′ is increasing in q when q < λM P mL , decreasing in q when

q ≥ λM P mH . It is increasing in q when λM P mL ≤ q < λM P mH if and only if λM P < λt . Thus the
result follows.
Plugging this optimal quantity policy to the profit function and also using Eq. (10), we have
nλ2 m t
(
′ (r − w − c)µ + nλM P λ′L mL t − M P2 L − n2 f λM P ≥ λt ,
Π = nλ2 µt
(r − w − c)µ + nλM P λ′H µt − M2P − n2 f λM P < λt .
This is a piecewise function changing characteristics at λM P = λt . Next step is to find the optimal
λM P . λ′L and λ′H are unique solutions to the first order conditions when qM
∗ ∗
P = λM P mL and qM P =
λM P mH , respectively (equivalently when λM P < λt and λM P ≥ λt , resp.). Therefore, there are nine
possible cases to consider: 1) 0 < λt ≤ λ′H ≤ λ′L , 2) 0 < λ′H < λt ≤ λ′L , 3) λ′H ≤ 0 < λt ≤ λ′L , 4) 0 <
λ′H ≤ λ′L < λt , 5) λ′H ≤ 0 ≤ λ′L < λt , 6) λ′H ≤ λ′L < 0 < λt , 7) 0 < λ′L < λ′H < λt , 8) λ′L ≤ 0 < λ′H < λt ,
9) λ′L < λ′H ≤ 0 < λt . The cases 3, 5 and 6 are not feasible. Case 9 is also not feasible because of
our assumption that w is large enough to eliminate the uninteresting case where only MC arises in
the solution, i.e., w > c(β − 1)(1 − α)/αβ. Hence, we need to investigate the remaining five possible
cases. Define
. λ′2 mL t c . . λ′2 µt
r r
tmL . tµ
nuL = L , nL = 3
, nuH = H , ncH = 3
.
4f 4f 4f 4f
Case 1) 0 < λt ≤ λ′H ≤ λ′L .: We have the following:

(1/n, mH /n)
 1/n < λt ,
∗ ∗
(λM P , q ) = (1/n, mL /n) λt ≤ 1/n < λ′L ,
(λ′ , λ′ m )

λ′L ≤ 1/n.
L L L

a3
Plugging this into the profit function, we have


u ′
ΠL n ≤ 1/λL ,

′
Π (n) = ΠcL 1/λ′L < n ≤ 1/λt ,
Πc 1/λ < n,

H t
. . .
where ΠuL = Π′ (q = λM P mL , λM P = λ′L ), ΠcL = Π′ (q = mL /n, λM P = 1/n), ΠuH = Π′ (q =
.
λ′H mH , λM P = λ′H )) and ΠcH = Π′ (q = mH /n, λM P = 1/n) . Superscript u (c) represents an uncov-
ered (covered) market. All these functions have a negative second order derivative with respect to
n, and hence they are concave. We now solve arg maxn Π′ (n). Define the derivatives of Π′ (n) when
λ′2
L mL t λ2
t mL t λ2
t µt
n → 1/λ′− ′+ − +
L , 1/λL , 1/λt , 1/λt , respectively, as d1 = d2 = 2
− λ2f′ , d3 = 2
− 2f
λt
, d4 = 2
− 2f
λt
.
L
We can show that d1 > d4 > d3 . Therefore, we need to explore the following cases to find n∗ : 1)
0 ≥ d1 > d4 > d3 2) d1 > 0 ≥ d4 > d3 3) d1 > d4 > 0 ≥ d3 4) d1 > d4 > d3 > 0.
λ′3 m t .
1) This case arises if and only if f ≥ L 4 L = fL′ , and when it does, n∗ = nuL , meaning a hybrid
strategy is optimal. The optimal solution is L′u .
λ3
t µt .
2) This case arises if and only if fL′ > f ≥ 4
= ftµ . The optimal strategy is pure MP and the
optimal solution is L′c .
3
3) This case arises if and only if ftµ > f ≥ λt m
4
Lt
. We need to compare the maxima of ΠcH and ΠcL .
p p
We can show that Πc∗L = (r − c)mL − 3/2
3
m2L f 2 t/2 and Πc∗
H = rµ − cmH − 3/2
3
µ2 t2 f /2, where ∗
denotes the maxima.
2 (β − 1)3 .
Πc∗ c∗ 3
L < ΠH ⇔ f < tλt mL = fc .
27 (β 2/3 − 1)3
λ3
t mL t
In addition, ftµ > fc > 4
. Therefore,
(
∗
L′c : ftµ > f ≥ fc ;
(n , λ∗M P , q ∗ , λ∗M C ) = λ3
t mL t
H′c fc > f ≥ 4
.
λ3
t mL t
4) This case arises if and only if 4
> f. In this case, (n∗ , λ∗M P , q ∗ , λ∗M C ) = H′c .
Combining from 1)-4), we have

′
Lu
 f ≥ fL′ ,
∗ ∗ ∗ ∗
(n , λM P , q , λM C ) = L′c fL′ > f ≥ fc ,
H′

fc > f.
c
Case 2) 0 < λ′H < λt ≤ λ′L : This is the most complicated case. We have the following:


 (1/n, mH /n) 1/n ≤ λ′H ,
(λ′ , λ′ m )

λ′H ≤ 1/n < λt ,
H
(λ∗M P , q ∗ ) = H H

 either (1/n, mL /n) or (λ′H , λ′H mH ) λt ≤ 1/n < λ′L ,

either (λ′L , λ′L mL ) or (λ′H , λ′H mH ) λ′L ≤ 1/n.


a4
In particular, for last two parts there are two local maxima. In this case,


max{ΠuL , ΠuH } n ≤ 1/λ′L ,
max{Πc , Πu } 1/λ′ < n < 1/λ ,

t
Π′ (n) = u
L H L
′

Π H 1/λ t ≤ n ≤ 1/λ H,

 c ′
ΠH 1/λH < n,
where Πji ’s are defined above. We first find the optimum for the following cases: 1) n ≤ 1/λ′L , 2)
1/λ′L < n < 1/λt .
1) n ≤ 1/λ′L : In this case,
nλ′2
L mL t nλ′2 µt p
ΠuL > ΠuH ⇔ > H ⇔ λ′L > λ′H β.
2 2
√
2) 1/λ′L < n < 1/λt : When λ′L ≤ λ′H β, it must be that ΠuH > ΠcL . This is because we have ΠuH > ΠuL
√
, and also ΠuL > ΠcL . Suppose that λ′L > λ β. We show ∃n0 such that ΠcL > ΠuH ⇔ n < n0 .
tmL nλ′2 µt
ΠcL > ΠuH ⇔ (r − c)mL − > (r − w − c)µ + H ,
2n 2
2 ′2 µ 2n
⇔ n λH − (wµ − α(r − c)(mH − mL )) + 1 < 0,
mL mL t
⇔ n2 λ′2 β − 2nλ′ + 1 < 0
| H {z L }
.
=Γ(n)
Additionally, Γ(n) = 2λ′2 ′

H β > 0, Γ(1/λL ) < 0. Showing Γ(1/λt ) > 0 proves the existence of n0 .
λ′2
H λ′L
Γ(1/λt ) = β − 2 + 1,
λ2t λt
2(βλ′H −λ′L ) 2
substituting λt = β−1
, Γ(1/λt ) = β (λ′H + βλ′H − 2λ′L ) /4(λ′L − βλ′H )2 > 0. Hence the existence
of n0 . The closed form expression can be found because Γ is a second order polynomial. We can
√ √
split Case 2 into two: Case 2.a) 0 < λ′H < λt ≤ λ′L ≤ λ′H β and Case 2.b) 0 < λ′H < λt < λ′H β ≤ λ′L .
√
Case 2.a) 0 < λ′H < λt ≤ λ′L ≤ λ′H β. We have
(
ΠuH n ≤ 1/λ′H ,
Π′ (n) = .
ΠcH n > 1/λ′H .
This is a continuous function. Checking the derivative at n = 1/λ′H , we have (n∗ , λ∗M P , q ∗ , λ∗M C ) = H′u
if f > fH′ , and (n∗ , λ∗M P , q ∗ , λ∗M C ) = H′c if f ≤ fH′ .
√
Case 2.b) 0 < λ′H < λt < λ′H β < λ′L . In this case,


 ΠuL n ≤ 1/λ′L ,
Πc 1/λ′ < n < n ,

0
Π′ (n) = L
u
L
′
(11)

 Π H n 0 ≤ n ≤ 1/λ H,

 c ′
ΠH 1/λH < n.

a5
.
Note that limn→1/λ′− ΠuL = limn→1/λ′+ ΠcL = d1 . Define d5 = limn→n− dΠcL / dn = tmL /(2n0 ) − 2n0 f ,
L L 0
. .
d6 = limn→n+ dΠuH / dn and d7 = limn→1/λ′− dΠuH / dn = limn→1/λ′+ dΠcH / dn = λ′2H µt/2 − 2n0 f . We
0 H H
can show that d1 > d6 > max{d5 , d7 }. Additionally, d5 > d7 ⇔ f > (tmL )/4 (λ′2 2 ′
H β − 1/n0 )/(1/λH −
.
n0 ) = fx .
. . ′
Define fn0 = tmL /4n30 and fH′ = (λH3 µt)/4, where d5 > 0 ⇔ f < fn0 and d7 > 0 ⇔ f < fH′ . We can
show that fx > fH′ ⇔ λ′H β 1/3 > 1/n0 and fx > fn0 ⇔ λ′H β 1/3 > 1/n0 , and λ′H β 1/3 > 1/n0 ⇔ λ′L >
λ′H (β 2/3 + β 1/3 )/2 > λ′H β 1/2 . Therefore, we consider two cases 2.b.1) λ′L > λ′H (β 2/3 + β 1/3 )/2 and
2.b.2) λ′L ≤ λ′H (β 2/3 + β 1/3 )/2.
2.b.1) λ′L > λ′H (β 2/3 + β 1/3 )/2: Suppose 0 ≥ d1 > d4 > max{d7 , d5 }(⇔ f ≥ fL′ ). From Eq. (11), we
. 0
have (n∗ , λ∗M P , q ∗ , λ∗M C ) = L′u . Suppose d1 > 0 ≥ d4 > max{d7 , d5 }(⇔ fL′ > f ≥ λ′2
H µt/4n0 = fH .).
From Eq. (11), we have (n∗ , λ∗M P , q ∗ , λ∗M C ) = L′c

Suppose d1 > d4 > 0 ≥ max{d7 , d5 }. We need to compare the maxima at L′c and H′u . We can show
that in this region d1 > d4 > 0 ≥ max{d7 , d5 } ⇔ fH0 > f ≥ fH′ .
′ 3 f 1/3 λ′4 µβt

Πc∗ u∗
L > ΠH ⇔ λL > + H .
2 2mL t 16f
We can show that RHS is decreasing in f , and limf →f 0 RHS < λ′L due to continuity. And,
H
.
limf →fH′ RHS = λ′H K1 , where K1 = (3β 1/3 + β)/4. Hence, if λ′H K1 ≥ λ′L , ∃fcu
′
such that above
′
inequality holds if and only if f > fcu . Otherwise, the inequality always holds. It is easy to see that
both these cases are feasible.
Suppose d1 > d4 > d7 > 0 ≥ d5 (⇔ fH′ > f ≥ fn0 ). In this case, Πc∗ c∗
L ≥ ΠH ⇔ f ≥ fc . Additionally,
fH′ > fc ⇔ λ′L > K1 λ′H . Then, when λ′L ≤ K1 λ′H , fc ≥ fH′ and for fH′ ≥ f > fn0 , the solution is
(n∗ , λ∗M P , q ∗ , λ∗M C ) = H′c . When λ′L > K1 λ′H , we compare fc and fn0 . It can be shown fc > fn0 . Thus
if fc > f ≥ fn0 , the solution is H′c as above. Otherwise, when fH′ > f ≥ fc , the solution is L′c .
Finally, for d1 > d4 > d7 > d5 > 0(⇔ f < fn0 ), we can show that the solution is H′c . Combining all
these for λ′L > λ′H (β 2/3 + β 1/3 )/2, we have
 ′
Lu
 f ≥ fL′ ,
′
(fL′ > f ≥ fH0 ) or (λ′H K1 < λ′L and fH0 > f ≥ fc )

Lc


(n∗ , λ∗M P , q ∗ , λ∗M C ) = or (λ′H K1 ≥ λ′L and fH0 > f ≥ fcu′
),
H′ ′ ′ ′ ′


 λH K1 ≥ λL and fcu > f > fH ,
 ′u


Hc (λ′H K1 ≥ λ′L and fH′ ≥ f ) or (λ′H K1 < λ′L and fc > f ) .
2.b.2) Now suppose that λ′L ≤ λ′H (β 2/3 + β 1/3 )/2. In this case, we have fx ≤ fH′ ≤ fn0 . So, when
0 ≥ d1 > d6 > max{d7 , d5 }(⇔ f ≥ fL ) and d1 > 0 ≥ d6 > max{d7 , d5 } (fL′ > f ≥ fH0 ), the solution is
the same as the previous case, i.e., 2.b.1.

a6
When d1 > d6 > 0 ≥ d5 ≥ d7 (⇔ fH0 > f ≥ fn0 ), we compare the profits of L′c and H′u . Similar to the
′ ′
case 2.b.1, we can show that in this case ∃fcu such that Πc∗ u∗
L > ΠH if and only if f > fcu . Therefore,
(
∗ ∗ ∗ ∗ L′c fH0 > f ≥ fcu
′
,
(n , λM P , q , λM C ) = ′ ′
Hu fcu > f ≥ fn0 .
When d1 > d6 > d5 > 0 > d7 (⇔ fn0 > f > fH′ ), the unique optimizer is H′u . Similarly, when d1 > d6 >
d5 > d7 ≥ 0(⇔ fH′ ≥ f ), the unique optimizer is H′c .
Combining Cases 2.a and 2.b, we have
 ′ √ √
Hu λ′L ≤ λ′H β and f > fH′ or λ′H β < λ′L ≤ λ′H K1 and fcu ′
> f > fH′ ,
√ √

′
λ′L ≤ λ′H β and f ≤ fH′ or λ′H β < λ′L ≤ λ′H K1 and f ≤ fH′

Hc


(n∗ , λ∗M P , q ∗ , λ∗M C ) = or (λ′L > λ′H K1 and fc > f ) ,
√
L′ λ′H β < λ′L ≤ λ′H K1 and f > fL′ or (λ′L > λ′H K1 and f > fL′ ) ,



 ′u √


Lc λ′H β < λ′L ≤ λ′H K1 and fL′ ≥ f ≥ fcu
′
or (λ′L > λ′H K1 and fL′ ≥ f ≥ fc ) ,
We can show that for Case 4, 7 and 8, the solution is

(
H′u f < fH′ ,
(n∗ , λ∗M P , q ∗ , λ∗M C ) =
H′c f ≥ fH′ .
. √ .
Define g1 (w) = λ′H − (λ′L )/( β), g2 (w) = λ′H − λ′L K1 . Then, g1′ (w), g2′ (w) < 0. And,
√
1 1 β −1+α−α β
lim g1 (w) = r 1− √ −c . (12)
w→r−c t β αβ
√ √
The right hand-side is always positive if r/c > β − 1 + α β − αβ / β − 1 αβ = (1 − α +
√ √ .
β)/(α β) = κ2 And, for r/c < κ2 , w1 is
√
β +1 p p .
g1 (w) = 0 ⇔ w = rα β − c(1 − α + α β) = w1 .
αβ
So, when r/c < κ2 , g1 (w) is positive if and only if w < w1 . Similarly, we can show that g2 (w) > 0 if
.
and only if r/c > (K1 (α + β − 1) − αβ)/(αβ(K1 − 1)) = κ1 , or r/c < κ1 and w < w2 , where w2 is the
unique solution to g2 (w2 ) = 0 in this case (see Table 2 for the expression of w2 ). Putting all these
together leads to the proposition. □
Proof of Proposition 3: Note that fH′ , fc , w2 , κ1 and κ2 are defined in the proof of Proposition
2. fH and fcu are defined in the proof of Proposition 1. R is defined in this proof.
Clearly, hybrid strategy can reduce the environmental impact only if the solution under pure
MP is either (A) Hu or (B) Hc , but the solution under hybrid strategy is H′u . These solutions are
given in Proposition 1 and 2.
Now, suppose that r/c ≥ κ2 , and hence product is a high value product. Noting that fH′ < fH ,
there are two cases: 1) fH < f , which corresponds to (A) and 2) fH′ < f ≤ fH which corresponds
to (B)

a7
1) fH < f : Under hybrid strategy, the solution is H′u and under pure MP solution is Hu (A).
Therefore, using environmental impact metric given in the main text, E[IH′u − IHu ] is equal to
Eℓ (1 − nH λH )µ .
Es µ(1 − nH λH ) − Eℓ (mH − µ)(nH λH − n′H λ′H ) < 0 ⇔ > = R.
Es (mH − µ)(nH λH − n′H λ′H )
2) fH′ < f ≤ fH : Under hybrid strategy, the solution is H′u while under pure MP, the solution is Hc
(B). Clearly, E[IHc ] > E[IH′u ] since n′H λ′H < 1.
Now suppose that κ1 ≤ r/c < κ2 , hence product is a moderate value product. If w ≤ w1 , then
fL > fcu > fH > fH′ , and (A) happens if and only if fH < f < fcu and (B) happens if and only
if fH′ < f ≤ fH . If w1 < w, then fL > fL′ > fcu
′
> fcu > fH > fH′ , and (A) happens if and only if
fH < f < fcu and (B) happens if and only if fH′ < f ≤ fH . Using a similar comparison we made for
high value products, the result follows.
Finally, suppose that r/c < κ1 , hence product is a low value product. Under pure MP, the solution
can never be Hu . Therefore, hybrid strategy can reduce environmental impact only if (B) happens.
This happens if and only if w ≤ w2 and fc > f > fH′ . Thus, the result follows. □
Proof of Corollary 1: Hybrid production increases overproduction whenever the solution changes
from L to H. From Proposition 1 and 2, we can show that in these regions, the expected sales also
increase, and thus increasing the environmental impact. □
Proof of Proposition 4: It is sufficient to show that as w decreases, the thresholds in Proposition
3 change in a way that expands the win-win region. To see this note that as w ↓, fH′ ↓ and R ↓.
Noting that the rest of thresholds are not a function of w, this proves the proposition. □
Proof of Proposition 5: The expressions κ1 , κ2 and w1 are defined in the proof of Proposition
2. The expression ft is defined in this proof (see also Table 2). First note the followings.
1. fH′ = λ′3 ′ ′
H µt/4. Because dλH / dw > 0, dfH / dw > 0.
2. fL′ = λ′3 ′ ′
L dL t/4. Because dλL / dw > 0, dfL / dw > 0.
′
3. From the proof of Proposition 2, fcu is defined by
′ 1/3 λ′4
3 fcu µβt .
λ′L − − H ′
= χ(fcu ) = 0.
2 2mL t 16f
′
Thus from implicit function theorem dfcu / dw = −(∂χ/∂w)/(∂χ/∂f )|f =fcu
′ . We know that
∂χ/∂f > 0 (cf. proof of Proposition 2), and hence ∂χ/∂w > 0 ⇔ β − (4λ′3
H µβt)/(16f ) > 0 ⇔
f > (λ′3 ′ ′ ′ ′
H µt)/4 = fH . We know that in this region fcu > fH , and hence dfcu / dw > 0.
High value products: For high-value products, solution is H′c if f ≤ fH′ and is H′u if f > fH′ . As
w decreases fH′ decreases. As a result, H′u grows over H′c . Hence, environmental impact (strictly)
decreases for the region where H′u replaces H′c but remains same for the region that remains as H′c .
Within H′u environmental impact (strictly) decreases because mass-customized products replaces
mass-produced products.

a8
Moderate value products: For moderate-value products, suppose that w ≤ w1 , and hence solution
is either H′c or H′u . Then, the result is the same as high value products.
When w1 > w, solution is either L′i or H′i , where i ∈ {c, u}. In this case, the boundary between L′c
and L′u is fL′ . Therefore, L′u grows over L′c as w decreases, making environmental impact strictly
worse for the region replaced by L′u since E[IL′c ] < E[IL′u ].
The boundary between H′u and L′c is fcu
′
. This means that as w decreases H′u grows over L′c ,
(strictly) increasing the environmental impact for the regions where H′u replaces L′c .
We also know that for this case H′u grows over H′c as w decreases, (strictly) decreasing the
environmental impact for the region replaced by H′u .
Finally, suppose that w > w1 and f > fL′ , and hence solution is L′u . Also suppose that as w
decreases, w becomes smaller than w1 . In this case, the solution becomes H′u because dfL′ / dw > 0
and limw→w1 fL′ = fH′ . Therefore, environmental impact jumps up at w = w1 . Now suppose that
w > w1 and fL′ ≥ f ≥ fcu
′
so that the solution is L′c . Also suppose that as w decreases, w becomes
smaller than w1 . In this case, the solution becomes H′u because dfL′ / dw > 0, dfcu
′
/ dw < 0 and
limw→w1 fL′ = limw→w1 fcu
′
= fH′ . Therefore, environmental impact jumps up at w = w1 .
Low value products: For low value products, when w < w2 , the result is same as moderate value
products.
Now suppose that w > w2 . The boundary between L′u and L′c is fL′ , and dfL′ / dw > 0. Therefore,
L′u grows over L′c as w decreases, making environmental impact (strictly) worse for the region
replaced by L′u since E[IL′c ] < E[IL′u ].
The boundary between L′c and H′c is fc and it is not a function of w. Hence the boundary between
these regions does not change.
When w = w2 , the only difference with the case of w > w2 arises when f = fc . In this case, as w
decreases, the solution changes from L′c to H′u , (strictly) increasing the environmental impact.
Finally, in all the cases above, when the solution does not change and remains as L′c or H′c ,
environmental impact does not change. When the solution does not change and remains as L′u (H′u ),
environmental impact increases (decreases) in a strict sense because mass-customized products
replace mass-produced products. ft is defined as follows.
(
. f ′ w1 < w ≤ min{(r − c), w2 },
ft = cu
fc min{(r − c), w2 } < w < r − c.
□
Proof of Proposition 6: It is sufficient to characterize what happens to the boundaries in Propo-
sition 3 as x increases. We can obtain the environmental impact comparison of the MP model

a9
with a disposal fee and the hybrid model with a disposal fee by making following modifications to
Proposition 3
κ1 → κd1 , κ2 → κd2 , fH → fHd , fH′ → fH′d , fc → fcd , fcu → fcu

d
, R → Rd , w2 → w2d ,
where all the notations with a superscript d are defined below. We can show that as x ↑, we have
κd1 ↑, κd2 ↑, fHd ↓, fH′d ↓, fcd ↓, fcu
d
↓, w2d ↓, Rd ↑ . Noting that when x = 0, we revert to the base model;
this proves the result.
We next define the notations above by solving the pure MP and the hybrid models. For the
hybrid model, first assume r − αc − x 1−α α
> 0 and define
. 2(β − 1)3 (λdt )3 mL t

. c 1−α ′d . 1 (β − 1)(1 − α)
d
λt (x) = (r − − x ), λH (x) = w − (c + x) , fc′d (x) = ,
α α t αβ 27(β 2/3 − 1)3
. t(λ′d
H) µ
3
. x(β − 1)(1 − α) d . x(β − 1)(1 − α)
fH′d (x) = , κd1 (x) = κ1 + , κ2 (x) = κ2 + ,
4 cαβ cαβ
λ′L
g1′d (w) = (λ′d H − √ ), g2d (w) = λ′d ′
H − λL K1 ,
β
. ∗ µt(λ′d H)
2
H′d
u (x) = (n = , λ∗M P = λ′d ∗ ′d ∗
H , qM P = λH mH , λM C = 1 − n λH ),
∗ ′d
4f
r
′d . ∗ 3 tµ ∗ 1 ∗ mH
Hc (x) = (n = , λM P = ∗ , qM P = , λ∗M C = 0),
4f n n
. ∗ mL t(λ′L )2 ∗
L′d
u = (n = , λM P = λ′L , qM ∗ ′ ∗
P = λL mL , λM C = 1 − n λL ),
∗ ′
4f
r
′d . ∗ tmL ∗ 1 ∗ mL ∗
Lc = (n = 3 , λM P = ∗ , qM P = , λM C = 0)
4f n n
′d
where λ′L and K1 are defined in the proof of Proposition 2. Define fcu (x), w1d (x) and w2d (x) as the
unique solutions to the following equations, respectively:
. 3 f 1/3 (λ′d )4 µβt

Φ′d (f ) = λ′L − ( ) − H = 0, g1′d (w) = 0, g2′d (w) = 0.
2 2mL t 16f
Finally, define n′d ′d ′d ′d
H (nL ) as the optimal n when the solution is Hu (Lu ).
By making the following changes to Proposition 2, we can obtain the solution for this model, in
which a disposal fee is charged for overproduction.
fc → fc′d , fcu
′ ′d
→ fcu , fH′ → fH′d , κ1 → κd1 , κ1 → κd2 , w1 → w1′d , w2 → w2′d , H′u → H′d
u,
H′c → H′d ′ ′d ′ ′d
c , Lu → Lu , Lc → Lc ,
where i → j means replace i with j. Additionally, using the proof of Proposition 2, we can show
that when r − αc − x 1−α
α
≤ 0 ⇔ x ≥ (αr − c)/(1 − α), the solution can never be H′d
i , where i ∈ {u, c},
and it has to be one of L′d ′d ′d ′

c and Lu . We can show that it is Lu if and only if f > fL . Intuitively, a
very high x, discourages solution H′d

i .

a10
For the MP model, similar to the hybrid model, the solution can be found using Proposition 1.
First assume r − αc − x 1−α α
> 0. Define
. 2(β − 1)3 (λdt )3 mL t

d . c 1−α d . 1 β −1+α (β − 1)(1 − α)
λt (x) = (r − − x ), λH (x) = r−c −x , fcd (x) = ,
α α t αβ αβ 27(β 2/3 − 1)3
. t(λdH )3 µ d . x(β − 1)(1 − α) d . x(β − 1)(1 − α)
fHd (x) = , κ1 (x) = κ1 + , κ2 (x) = κ2 + ,
4 cαβ cαβ
r
. µt(λdH )2 . d ∗ . ∗ 3 tµ ∗ 1 ∗ mH
Hdu (x) = (n∗ = = nH , λM P = λdH , qM ∗ ′d d
P = λH mH ), Lu (x) = (n = , λM P = ∗ , qM P = ),
4f 4f n n
r
d . ∗ mL t(λL )2 ∗ ∗ d . ∗ tmL ∗ 1 ∗ mL
Lu = (n = , λM P = λL , qM P = λL mL ), Lc = (n = 3 , λ M P = ∗ , qM P = ),
4f 4f n n
where λL = limw→r−c λ′L , and λ′L and K1 are defined in the proof of Proposition 2. Define fcu
d
(x) as
the unique solutions to the following equations, respectively:
. 3 f 1/3 (λdH )4 µβt

Φd (f ) = λL − ( ) − = 0.
2 2mL t 16f
Finally, define ndH (ndL ) as the optimal n when the solution is Hud (Ldu ).
By making the following changes to Proposition 1, we can obtain the solution for this modified
model, in which a disposal fee is charged for overproduction.
fc → fcd , fcu → fcu

d
, fH → fHd , κ1 → κd1 , κ2 → κd2 , Hu → Hdu , Lu → Ldu , Lu → Ldu , Lc → Ldc .
c
Additionally, using the proof of Proposition 2, we can show that when r − α
− x 1−α
α
≤0⇔x≥
(αr − c)/(1 − α), the solution can never be Hid , where i ∈ {u, c}, and it has to be one of Ldc or Ldu
. Intuitively, a very high x, discourages solution Hid . In particular, in this case, the solution is Ldu
.
(Ldc ) if and only if f > fL (f ≤ fL ). Finally, Rd = ((1 − ndH λdH )µ)/((mH − µ)(ndH λdH − n′d ′d
H λH )). □
Proof of Proposition 7: First, note that the solution for the hybrid model is stated in the proof
of Proposition 6. When x = 0, the solution is the same as the basic hybrid model solution without
a disposal fee.
As x ↑ , we can show that, λ′d d ′d ′d ′d ′ ′
H ↓, λt ↓, fH ↓, fc ↓, fcu ↓ . If the solution is Lu or Lc when x = 0, this
solution does not change because there is no-overproduction and hence no disposal fee. Therefore,
we need to understand how solutions H′d ′ ′d ′
u (0) (= Hu ) and Hc (0) (= Hc ) change when x > 0 for the
hybrid firm.
Assume x < (αr − c)/(1 − α). Suppose that the solution is H′d
c (0). From the proof of Proposition
√
2, we know that this can happen only in the following regions: A) λ′d ′ ′d
H (0) ≥ λL / β and f ≤ fH (0),
√
B) λ′L / β > λ′d ′ ′d ′ ′d ′d
H (0) ≥ λL /K1 and f ≤ fH (0), C) λL /K1 > λH (0) and f < fc (0). Additionally, we
can show that fH′d (x) = fcu

′d
(x) = fc′d (x) when λ′d ′ ′d ′
H (x) = λL . We also know that λH , λL and K1 are
not functions of f . As x increases, λ′d ′d ′d

H ↓, fH ↓, fc ↓ . Therefore in all these cases, as x increases,

a11
ceteris paribus the range of f values where H′d

c (x) is the solution shrinks. This means that it must
be replaced by H′d ′ ′
u , Lc or Lu , clearly decreasing the environmental impact for these regions. If the
solution remains as H′d

c , the environmental impact does not change.
Suppose that the solution is H′d

u (0) for a given set of parameters. This can happen only in the
√ √
following regions: A) λH (0) ≥ λL / β and f > fH′d (0), B) λ′L / β > λ′d
′d ′ ′ ′d
H (0) ≥ λL /K1 and fcu > f >
fH′d (0). Because λ′d ′d ′d

H , fH and fcu decrease in x, only one of the followings can happen: The solution
1) may remain as H′d ′d ′d ′d

u , 2) may change to Lu or Lc . It can never change to Hc . In all these
cases, environmental impact strictly decreases. Note that in 1) it decreases because some of the
mass-produced products are replaced by mass-customized products.
Now assume x ≥ (αr − c)/(1 − α) and when x = 0, the solution is either H′d ′d
u (0) or Hc (0). We know
that the new solution with disposal fee must be one of L′d ′d
c and Lu , decreasing the environmental
impact. □
Proof of Proposition 8: It is sufficient to characterize what happens to the boundaries in Propo-
sition 3 as s increases. We can obtain the environmental impact comparison of the MP model and
the hybrid model with a disposal fee by making following modifications to Proposition 3
κ1 → κτ1 , κ2 → κτ2 , fH → fHτ , fH′ → fH′τ , fc → fcτ , fcu → fcu

τ
, R → Rτ w2 → w2τ ,
where all the notations with a superscript τ are defined below. We can show that as s ↑, we have
κτ1 ↓, κτ2 ↓, fHτ ↑, fH′τ ↑, fcτ ↑, fcu
τ
↑, w2τ ↑, Rτ ↓ . Noting that we revert to the base model when s = 0,
this proves the result.
We next define the notations with a superscript τ above by solving the MP and the hybrid
models. For the hybrid model, first define
. 2 c − s(1 − α(1 − τ )) . 1 (α − 1)(β − 1)(c − s) . βw − (β − 1)(−c + sτ + r)

λτt (τ ) = (r − ), λ′τH = (w + ), λ′τL = ,
t α t αβ t
. t(λ′τ 3
L ) mL . 2(β − 1)3 (λτt )3 mL t ′τ . t(λ′τ 3
H) µ
fL′τ = , fcτ = , fH = ,
4 27(β 2/3 − 1)3 4
√ √
. β + 1 s α βτ − 1 + 1 . (β − 1)s(αβτ − αK1 + K1 )
κτ2 = κ2 − √ , κτ1 = κ1 − ,
α βc αβc(K1 − 1)
µt(λ′τ 2
r
′τ . ∗ H) ∗ ′τ ∗ ′τ ′τ . ∗ tµ ∗ 1 ∗ mH
Hu = (n = , λM P = λH , qM P = λH mH ), Hc = (n = 3 , λ M P = ∗ , qM P = ),
4f 4f n n
. ∗ mL t(λ′τ 2
r
L) τ . tmL ∗ 1 ∗ mL
L′τ
u = (n = , λ∗M P = λ′τ ∗ ′τ
L , qM P = λL mL ), Lc = (n =
∗ 3
, λ M P = ∗ , qM P = ).
4f 4f n n
′τ
Define fcu as the unique solution to the following equation:
. 3 f 1/3 (λ′τ 4
H ) µβt
Φ′τ (f ) = λ′τ
L − ( ) + = 0.
2 2mL t 16f
Finally, define n′τ ′τ ′τ ′τ
H (nL ) as the optimal n when the solution is Hu (Lu ).

a12
By making the following changes to Proposition 2, we can obtain the solution for the hybrid
model with recycling (regardless of whether recycling is profitable or costly).
′ ′τ
fc → fcτ , fcu → fcu , fH′ → fH′τ , fL′ → fL′τ , H′u → H′τ ′ ′τ ′ ′τ ′ ′τ
u , Hc → Hc , Lu → Lu , Lc → Lc .
For the MP model, define

. 1 β −1+α . r − c + sτ
λτH = r−c − s(1 − τ ) , λτL = ,
t αβ t
. t(λτL )3 mL . 2(β − 1)3 (λτt )3 mL t τ . t(λτH )3 µ
fLτ = , fcτ = , fH = ,
4 27(β 2/3 − 1)3 4
√ √
τ .
β + 1 s α βτ − 1 + 1 . (β − 1)s(αβτ − αK1 + K1 )
κ2 = κ2 − √ , κτ1 = κ1 − ,
α βc αβc(K1 − 1)
r
. µt(λτH )2 ∗ τ . tµ ∗ 1 ∗ mH
Hτu = (n∗ = ∗
, λM P = λτH , qM τ
P = λH mH ), Hc = (n =
∗ 3
, λ M P = ∗ , qM P = ),
4f 4f n n
r
τ . ∗ mL t(λτL )2 ∗ τ ∗ τ τ . ∗ tmL ∗ 1 ∗ mL
Lu = (n = , λM P = λL , qM P = λL mL ), Lc = (n = 3 , λM P = ∗ , qM P = ),
4f 4f n n
τ
where K1 is defined in the proof of Proposition 2. Define fcu as the unique solutions to the following
equation:
. 3 f 1/3 (λτH )4 µβt
Φτ (f ) = λτL − ( ) − = 0.
2 2mL t 16f
Finally, define nτH (nτL ) as the optimal n when the solution is Huτ (Lτu ).
The solution for the profitable recycling case can be found from Proposition 1 by making the
following changes:
fc → fcτ , fcu → fcu

τ
, fH → fHτ , fL → fLτ , Hu → Hτu , Lu → Lτu , Lu → Lτu , Lc → Lτc .
.
Finally, define Rτ = ((1 − nτH λdH )µ)/((mH − µ)(nτH λτH − n′τ ′τ
H λH )). □
Proof of Proposition 9: The expression st is defined in this proof. First, note that the solution
for the hybrid model is stated in the proof of Proposition 8. It is also clear that when s = 0, the
solution is same as the basic hybrid model solution without disposal fee.
We now state and prove the following lemma.
Lemma 4. Suppose recycling takes place at a rate of τ and s > 0. With recycling, the hybrid
firm’s solution can change in one of the following ways: (i) If H′c → {H′τ ′ ′τ ′τ
c }, (ii) Hu → {Hu , Hc },
(iii) L′c → {L′τ ′τ ′τ ′τ ′ ′τ ′τ ′τ

c , Lu , Hu , Hc }, iv) Lu → {Lu , Hu , Hc }.
Proof of Lemma 4: We can show that as s increases, λ′τ ′τ ′τ ′τ ′τ τ ′τ

H ↑, λL ↓, λt ↑, fH ↑, fL ↓, fc ↑, fcu ↑ .
Using these comparative statics and the same line of reasoning in the proof of Proposition 7, the
lemma can be proved. □

a13
From this lemma, we know that the solution H′c becomes H′τ
c . In both solutions, the entire market
is covered and also total production is mH , and hence H′τ

c results in lower environmental impact
due to the recycling if and only if Esτ < Es and/or Elτ < El by definition.
Now suppose that the solution without recycling is lims→0 L′τ ′
c (= Lc ). Using Proposition 2, we
√
can show that this can happen only in the following cases 1) λ′τ ′τ ′τ
L (0)/ β > λH (0) ≥ λL (0)/K1 and
j . j
fL′τ (0) ≥ f ≥ fcu
′τ
(0), 2) λ′τ ′τ ′τ ′τ
L (0)/K1 > λH (0) and fL (0) ≥ f ≥ fc (0), where ηi (0) = lims→0 ηi . From
Lemma 4, we know that one of the followings may happen A)L′τ ′τ ′τ ′τ

c (0) → Lc (s), B) Lc (0) → Lu (s),
C) L′τ ′τ ′τ ′τ
c (0) → Hu (s) and D) Lc (0) → Hc (s). If A), then recycling makes environmental impact
smaller if and only if Esτ < Es and/or Elτ < El . We need to find when A) occurs.
Assume 1). Note that as s increases, λ′τ ′τ ′τ ′τ √ ′τ ′τ
L ↓, λH ↑, fL ↓, fcu ↑, and also limλτH →λτL / β fL − fcu = 0,
Therefore, define sp1 < c (sp2 < c) such that fL′τ (sp1 ) = f (fcu
′τ
(sp2 ) = f ) if it exists. If these do not
. .
exist, define sp1 = M (sp2 = M ), where M is an arbitrary number that is larger than c. Also define
.
sp = min{sp1 , sp2 , c}.
′τ ′τ ′τ
Now assume 2). limλ′τ H
→λ′τ
L
/K1 fL − fcu = 0, Therefore, define sq1 < c (sq2 < c) such that fL (sq1 ) =
. .
f (fcτ (sq2 ) = f ) if it exists. If these do not exist, define sq1 = M (sq2 = M ), where M is an arbitrary
number that is larger than c. Also define sq = min{sq1 , sq2 , c}.
Finally, define
( √
sp when λ′τ ′τ ′τ
L (0)/ β > λH (0) ≥ λL (0)/K1 ,
st =
sq when λ′τ ′τ
L (0)/K1 > λH (0).
It is easy to see that in all other cases we have Esτ Qτs + Elτ Qτl < Es Qs + El Ql . □
Proof of Proposition 10: First, note that the solutions of the MP model and the hybrid model is
the same as the profitable recycling model (which is stated in the proof of Proposition 8). Thus, from
the proof of Proposition 8) we know that s ↓, we have κτ1 ↑, κτ2 ↑, fHτ ↓, fH′τ ↓, fcτ ↓, fcu
τ
↓, w2τ ↓, Rτ ↑.
This proves the proposition. □
Proof of Proposition 11: The proposition can be shown using the same line of reasoning in
Proposition 9, hence it is omitted. □
B. Model Calibration
Here we explain how we calibrated the model parameters to generate the figures in the main text.
Table 3 provides an overview of the parameter estimates and their sources.
B.1. Consumer choice parameters (r, t, a, w) Franke et al. (2010) designed a series of
experiments to test how willingness-to-pay was affected when subjects (college students in this
case) customized their own T-shirts. Because this research was conducted in a controlled lab
environment, the authors were able to measure the willingness-to-pay without the influence of all
sorts of factors that would normally exist in a regular shopping experience. Also, they measured

a14
willingness-to-pay using a well-established, incentive-compatible method, called the BDM (Becker-

DeGroot-Marschak) mechanism. They found that the average willingness-to-pay (WtP) is 4.75e
for an off-the-shelf, standard T-shirt (Study 2), and 7.7e for a fully customized T-shirt, about 62%
higher than its off-the-shelf counterpart (Study 3). In January of 2010 (the paper’s publication
year), the average exchange rate from euro to dollar was 1.43 (Exchangerates 2021). Thus, we
estimate the reservation price of a mass-customized T-shirt to be r = 7.7 × 1.43 = $11. We designate
this value as the lower bound of our range of reservation prices, because college students are likely
to have low disposable income. Besides, it is clear from a brief visit to several custom T-shirt
websites that this value does represent the lower end of the spectrum for mass-customized T-shirt
prices (e.g., www.customink.com). To account for heterogeneity in products and consumers, and
to represent the typical industry practice, we use the range [11, 15] in our figures. Assuming that
the off-the-shelf T-shirt is located in the middle of the unit Hotelling line, the average distance
of a consumer to this T-shirt is 1/4. Therefore, from the delta between the WtP for custom and
standard T-shirts, we deduce that the following transportation cost would be consistent with these
studies: t = 4 × (7.7 − 4.75) = 11.6e. Converting this to dollars by using the same exchange rate,
we have t = 11.6 × 1.43 = $16.87. In Appendix C.4, we treat a version of our partial postponement
model that incorporates the utility consumers gain from the process of customization, which we
denote by a. Study 2 of Franke et al. (2010) implies that the utility from process enjoyment is about
8% of the consumer’s willingness-to-pay for a mass-customized T-shirt (i.e., 5.26 − 4.75 = 0.51 for a
willingness-to-pay of 6.85 − 0.51 = 6.34). Thus, using our lowest estimate for r, our point estimate
for a is 0.88. To reflect the heterogeneity across subjects in the experimental results of Franke
et al. (2010), we use a ∈ [0.3, 1.3] in our figures. Unfortunately, to the best our knowledge, there
is no empirical data on w. The largest range in which hybrid production arises for r ∈ [11, 15] is
w ∈ [2.6, 6]. Thus, we choose w within this range for our figures.
Table 3 Model parameter estimates based on fashion industry data
Parameter Value Reference

Willingness-to-pay for MC r ∈ [11, 15] Franke et al. (2010)
Transportation cost t = 16.87 Franke et al. (2010)
Process enjoyment from MC a ∈ [0.3, 1.3] Franke et al. (2010)
Low market size mL = 25, 000 Pich et al. (2002), Zara (2021)
High market size mH = 87, 500 Pich et al. (2002), Zara (2021)
Probability of high market size α = 0.5 Crofton and Dopico (2007)
Unit production cost for MP c=5 Adams (2017)
Unit production cost for MC c + ∆ with ∆ = 10% · c Cui et al. (2021)
Variety cost parameter f = (0, 30 × 104 ) Gap (2021), American Eagle (2021)
Environmental impact of sold products Es = 5.5kg CO2 -eq WRAP (2012)
Environmental impact of leftover products El = 4kg CO2 -eq WRAP (2012)
Disposal fee x = $0.26 The Fashion Law (2020)
Recycling rate τ = 15% Ellen MacArthur Foundation (2017)

a15
B.2. Market size parameters (mL , mH , α) According to Pich et al. (2002), Zara identifies
future “hit” designs and mass produces them in single runs of 100,000-350,000 units. Zara is well
known for its ability to match supply and demand; hence, we designate 100, 000 and 350, 000 as
the lowest and the highest demand for a clothing item. To find SKU-level demand for a T-shirt, we
divide these numbers with the number of different T-shirt sizes Zara carries, which is usually four:
small, medium, large, x-large (www.zara.com). Thus, mL = 25, 000 and mH = 87, 500. Crofton and
Dopico (2007) estimates that the apparel industry sells 49% of its items on clearance, which we
take as a proxy for the probability that an SKU is a dud. Therefore, rounding it to 50%, we set
the probability of a high market size to α = 1 − 50% = 0.5.
B.3. Supply-side parameters (c, ∆, f ) In Adams (2017), American Apparel’s president

states the cost of making a T-shirt as $5; so, we take c = 5. Our base model assumes the same
unit production cost for MP and MC. We also treat the case with a higher unit production cost
for MC in Appendix D, where we use ∆ = 10% · c based on labor time spent on personalized vs.
nonpersonalized products reported in (Cui et al. 2021, p. 360). To the best of our knowledge, there
is no empirical research that estimates f . So, to generate a plausible range for f , we use the gross
profit margins commonly observed in the industry, which tend to range from 25% to 45% (Gap
2021, American Eagle 2021). In our graphs we use an f range that ensures the gross profit margin
stays within this range; the implied gross profit margins in all our graphs vary from 23% to 45%.
B.4. Environmental impact parameters (Es , El , Esτ , Elτ ) The UK-based non-profit
WRAP conducts lifecycle analysis of various apparel items such as tops, bottoms, jackets, etc. (cf.
Table 25 in WRAP 2012). For tops, the estimates are: ep = 4.5 kg CO2 -eq, eu = 1.5 kg CO2 -eq, and
ed = −0.5 kg CO2 -eq. They estimate a negative ed , because in some cases used clothing is burned
to generate electricity. Assuming eo = ed for simplicity, these values lead to Es = ep + eu + ed =
5.5 kg CO2 -eq and El = ep + eo = 4 kg CO2 -eq. To estimate Esτ and Elτ , the impact parameters
under recycling, we assume that the unit disposal and overproduction impacts improve at a rate
equal to the recycling rate τ , which we estimate as 15% (see the next section, §B.5). Thus, eτd =
eτo = −0.575, which makes Esτ = 5.425 kg CO2 -eq and Elτ = 3.925 kg CO2 -eq.
B.5. Policy-related parameters (x, τ , s) The Fashion Law (2020) reports that France is
planning to impose a penalty of up to $16, 350 for destroying unsold products. Noting that the
upper bound on overproduction is mH − mL units in our model, this amounts to a per-unit penalty
of x = 16, 350/(87, 500 − 25, 000) = $0.26. The recycling rate for apparel in the US is reportedly
between 10% and 15% (Ellen MacArthur Foundation 2017, p. 37). This combined with the fact
that apparel recycling is expected to increase in the future, we use τ = 15%. Finally, we take |s|,
the financial impact of recycling whether it be positive or negative, to be 10% of the unit cost,
c = $5, i.e, |s| = 0.5.

a16
References for Online Appendix

Adams, S. 2017. American made supply co. bets it can win in the crowded market for direct-to-consumer
t-shirts. https://www.forbes.com/sites/forbestreptalks/2017/11/09/american-made-suppl
y-co-bets-it-can-win-in-the-crowded-market-for-direct-to-consumer-t-shirts/?sh=4f8b
18973883. Accessed: 2021-03-30.
Alptekinoğlu, A., C. J. Corbett. 2008. Mass customization vs. mass production: Variety and price competi-
tion. Manufacturing & Service Operations Management 10(2) 204–217.
American Eagle. 2021. Financials & filings. https://investors.ae.com/financials-filings/default.a

spx. Accessed: 2021-03-30.
Crofton, S., L. Dopico. 2007. Zara-inditex and the growth of fast fashion. Essays in Economic & Business
History 25(1) 41–54.
Cui, H., S. Rajagopalan, A. R. Ward. 2021. Impact of task-level worker specialization, workload, and product
personalization on consumer returns. Manufacturing & Service Operations Management 23(2) 346–366.
Ellen MacArthur Foundation. 2017. A new textiles economy: Redesigning fashion’s future. https://elle
nmacarthurfoundation.org/a-new-textiles-economy.
Exchangerates. 2021. Euro to us dollar spot exchange rates for 2010. https://www.exchangerates.or
g.uk/EUR-USD-spot-exchange-rates-history-2010.html#:~:text=Best%20exchange%20rate%3A
%201.4516%20USD,USD%20on%2007%20Jun%202010. Accessed: 2021-03-30.
Franke, Nikolaus, Martin Schreier, Ulrike Kaiser. 2010. The “I designed it myself” effect in mass customiza-
tion. Management science 56(1) 125–140.
Gap. 2021. Financial information. https://investors.gapinc.com/financial-information/default.a

spx#financial-year. Accessed: 2021-03-30.
Pich, M. T., L. Van der Heyden, N. Harle. 2002. Marks and spencer and zara: Process competition in the
textile apparel industry. INSEAD Business Case Study, INSEAD, Fontainebleau, France .
The Fashion Law. 2020. New french legislation prohibits the destruction of unsold goods, including cloth-
ing. https://www.thefashionlaw.com/new-french-legislation-prohibits-the-destruction-o
f-unsold-goods-including-clothing/. Accessed: 2021-03-30.
WRAP. 2012. A carbon footprint for uk clothing and opportunities for savings. Final Report, UK: Envi-
ronmental Resources Management Limited .
Zara. 2021. www.zara.com. Accessed: 2021-03-30.

e1
Extensions of the Base Model and Analysis in “Is Adopting Mass

Customization a Path to Environmentally Sustainable Fashion?”
by Alptekinoğlu and Örsdemir
This appendix contains the extensions of our base model and analysis to partial postponement for
MC and higher unit cost for MC (along with the proofs of corresponding new results).
C. Partial Postponement in Mass Customization

Here we extend our base model to incorporate partial postponement in the hybrid firm’s MC
operation. (Our base model corresponds to full postponement.) The general notion is that product
differentiation – in this case full customization on a subset of attributes – is delayed until consumers
specify their ideal product. Thus, in this new model, the firm’s MC operation sits somewhere on an
MTS-MTO continuum, with the MTS portion designed to produce an inventory of generic units,
and the MTO portion to turn those generic units into mass-customized products that are ideal as
far as some of the product attributes are concerned.
C.1. A Model of Partial Postponement Suppose a ρ fraction of the consumer’s ideal

utility r stems from MC. We call this the value of customization (VoC ) parameter (0 < ρ ≤ 1). It
can be thought of as the fraction of product attributes being customized, and it reflects the relative
importance of customization to the consumer. We keep the ideal utility, r, fixed as ρ varies, because
this offers a conservative test of our key question about adopting MC leading to a win-win (we also
treat a case with the effective ideal utility increasing in ρ in §C.4). As VoC increases, MC involves
more postponement to be able to deliver the desired relative value from customization. Also pegged
on this parameter, we assume the unit cost of production and the waiting cost associated with the
postponement phase of MC operation to be proportional to ρ.
The hybrid firm produces its standard or mass-produced products on an MTS basis as in the
base model. For mass-customized products, however, the hybrid firm uses a (partial) postponement
process. First, generic units are made to stock in advance of the realization of the market size (M )
at a unit cost (1 − ρ)c. Then, after M realizes, the generic units are customized on an MTO or
on-demand basis according to an individual consumer’s ideal product specifications at a unit cost
ρc. This customization phase has a lead time proportional to ρ, which imposes a disutility (cost of
waiting) of ρw on the consumer. Thus, higher VoC (higher ρ) implies less MTS and more MTO
in the hybrid firm’s MC operation, and longer wait for consumers who opt for a mass-customized
product (over the MTO portion of the production process). Consider, for example, the MC of
t-shirts. VoC may be generated by a variety of ways to customize a t-shirt: color(s) of the base
fabric; dimensions of the cut; text, image, or pattern (user-designed) to print or sew on the fabric,
etc. The higher the extent of customization, the higher the ρ parameter.

e2
Now, we specify the consumer utility functions. A mass-customized product θ ∈ Θ yields the
utility UM C (θ, pM C ) = r − ρw − pM C for a consumer at θ ∈ Θ, where the consumer’s waiting cost is
proportional to VoC. Customization involves a higher degree of postponement, hence takes longer
to deliver on demand, when it is relatively more important for consumers (higher ρ) – when they
derive a higher portion of the ideal utility from it. A mass-produced product x ∈ Θ yields the utility
UM P (θ, x, pM P ) = r − pM P − ρt|x − θ| for a consumer at θ ∈ Θ, where the consumer’s transportation
cost is proportional to VoC. When customization is relatively more important for consumers (higher
ρ), they incur a higher disutility from not receiving their ideal product due to lack of customization
in mass-produced products.
In sum, our new model incorporates an MTS-MTO operation with partial postponement for
MC within the Hybrid Model (in place of a pure MTO operation in our base model). It allows
there to be a continuum from MC to MP: the MC operation is closer or farther from the MP
operation (pure MTS) depending on where in the MTO-MTS continuum the postponement for
MC falls. When ρ = 1 (full postponement), this model is equivalent to our base model. When ρ = 0
(no postponement), the difference between mass-customized and mass-produced products vanishes,
because consumers attribute no value to customization. In the latter case, any standard product
is as good as a custom (ideal) product.
C.2. The MP and Hybrid Firm Decisions under Partial Postponement Similar to
the base model, the MP firm’s objective is to maximize its expected profit,
Π(n, pM P , qM P ) = pM P nE[min{qM P , M λM P }] − (cnqM P + f n2 )

| {z } | {z }
MP firm’s total revenue MP firm’s total cost
where the expectation is taken with respect to the market size M .

. .
We start with analyzing the MP firm’s decisions. Define λρL = (r − c)/ρt, and λρH = (r − c(β −
1 + α)/(αβ))/ρt, where β > 1 and 0 < λρH < λρL < 1. There are four types of solutions to the MP
firm’s problem:
µtρλ2ρH

.
Hρu = n∗ = , λ∗M P = λρH , qM∗
P = λ ρH m H , (13)
4f
r
. ∗ 3
tµρ ∗ 1 ∗ mH
Hρc = n = , λM P = ∗ , qM P = ∗ , (14)
4f n n
2
mL tρλρL

. ∗ ∗ ∗
Lρu = n = , λM P = λρL , qM P = λρL mL , (15)
4f
r
. ∗ 3
tmL ρ ∗ 1 ∗ mL
Lρc = n = , λM P = ∗ , qM P = ∗ . (16)
4f n n
In the first two solution types, Hρu and Hρc , the firm stocks for the high market size; and, in the
last two, Lρu and Lρc , for the low market size. We are now ready to state the MP firm’s solution.

e3
Note that the structure of the solution remains essentially the same as in the base model. Also,
the thresholds on r/c that define the high-, moderate- and low-value products are still the same
as in our base model solutions (§3.2 and §4.2). This facilitates cross-model comparisons.
stocking decisions of the MP firm in the partial postponement model.
(a) Hρu when f > fρH , or
(b) Hρc when f ≤ fρH .
(a) Lρu when f > fρL ,
(b) Lρc when fρL ≥ f ≥ fρcu ,
(c) Hρu when fρcu > f > fρH , or
(d) Hρc when f ≤ fρH .
(a) Lρu when f > fρL ,
(b) Lρc when fρL ≥ f ≥ fρc , or
(c) Hρc when f < fρc .
Next we analyze the hybrid firm’s problem under the postponement model. The hybrid firm’s
objective is to maximize its expected profit,
Π′ (n, pM P , qM P , pM C , qM C ) = pM P nE[min{qM P , M λM P }] − (cnqM P + f n2 )

| {z }
MP profit
+ (pM C − ρc)E[min{qM C , M λM C }] − (1 − ρ)cqM C ,

| {z }
MC profit
where the expectation is taken with respect to the market size M , and qM C is the total production
quantity of generic units, which are later turned into mass-customized products if there is demand
(after M realizes). An MC product can be priced to extract the entire consumer surplus, i.e.,
p∗M C = r − ρw. We can also show that λM C = 1 − nλM P as in our base model, and that qM
∗
C can be
either λM C mL or λM C mH .
In this case, there are six possible solutions: H0c , L0c , HLu , LLu , HH H
u , Lu . The base letters, L
and H, indicate whether the firm stocks mass-produced products for low or high market size, just
as in the base model. The superscript 0 denotes the solution in which MC does not arise. The
superscripts L and H denote whether the firm stocks the generic units for low or high market size,
∗ ∗
i.e., qM C = λM C mL or qM C = λM C mH , respectively. Define
. −βc + c + α(β − 1)r + αρw L . w

λLH = , λL = ,
αβρt t

e4
. (α − 1)(β − 1)c + αβw H . (β − 1)c((α − 1)ρ + 1) + α(−βr + r + βρw)

λH
H = , λL = .
αβt αρt
Then,
µtρ(λiH )2

i . ∗ ∗ i ∗ i ∗ ∗ i ∗ ∗
Hu = n = , λM P = λH , qM P = λH mH , λM C = 1 − n λH , qM C = λM C mi , i = {H, L},
4f
mL tρ(λiL )2

i . ∗ ∗ i ∗ i ∗ ∗ i ∗ ∗
Lu = n = , λM P = λL , qM P = λL mL , λM C = 1 − n λL , qM C = λM C mi , i = {H, L},
4f
r
0 . ∗ 3
tmL ρ ∗ 1 ∗ mL ∗ ∗
Lc = n = , λM P = ∗ , qM P = ∗ , λM C = 0, qM C = 0 ,
4f n n
r
0 . ∗ 3
tµρ ∗ 1 ∗ mH ∗ ∗
Hc = n = , λM P = ∗ , qM P = ∗ , λM C = 0, qM C = 0 .
4f n n
The next proposition describes the hybrid firm’s solution.
stocking decisions of the hybrid firm in the partial postponement model.
(a) HH H
u when {w ≤ w ∩ f > fH },
(b) HLu when {w > w ∩ f > fHL }, or

(c) H0c when f ≤ f H .
(a) LH H H
u when {wg1 < w < w ∩ f > fL },
(b) LLu when {w1 < w ∩ f > fLL },

(c) L0c when {(w1 < w ∩ fLL ≥ f ≥ fcu
L
) ∪ (wgH1 < w < w ∩ fLH ≥ f ≥ fcu
H
)} ,
(d) HH H H H H
u when {(w ≤ w 2 ∩ f > fH ) ∪ (wg1 < w ≤ w ∩ fcu > f > fH )},
(e) HLu when {(w1 < w ∩ fcu

L
> f > fHL ) ∪ (w < w ≤ wg1
L
∩ f > fHH )}, or
(f) H0c when {f ≤ f H }.
(a) LH H H
u when {wg1 < w < w 6 ∩ f > fL },
(b) LLu when {w1 < w ∩ f > fLL },

(c) L0c when {w3 < w ≤ w4 ∩ f L ≥ f ≥ f cu } ∪ {w5 < w ∩ f L ≥ f ≥ fρc },
(d) HH H H H H
u when {(w ≤ w 2 ∩ f > fH ) ∪ (wg1 < w ≤ w 6 ∩ fcu > f > fH )},
(e) HLu when {(w1 < w ≤ wg2

L L
∩ fcu > f > fHL ) ∪ (w < w ≤ wg1
L
∪ f > fHH )}, or
(f) H0c when {(w ≤ w4 ∩ f ≤ f H ) ∪ (w > w4 ∩ fρc ≥ f )}.
In our base model of the hybrid firm, we show that the solution depends on product value (r/c),
product variety cost (f ) and consumer waiting cost (w). Here, the impact of product value and
product variety cost on the solution remain the same: high product value and low product variety

e5
cost favor stocking mass-produced products for the high market size, i.e., Hji . For instance, for
high-value products, the solution is never Lji . For moderate- and low-value products, as f decreases,
ceteris paribus, the solution moves from Lji to Hjk . It is also true that lower w promotes stocking
mass-produced products for the high market size. In fact, if w is sufficiently low, the solution is Hji
regardless of product type, similar to the base model.
One of the key drivers of our results and insights that rest on the base model (with full postpone-
ment) is the fact that adopting MC can possibly hurt the environment via increased overproduction
(§4.2 and §5). The same dynamic is at play in our model with partial postponement. To make this
precise, we now provide a result that spells out the possibilities, and shows increased overproduc-
tion is still in the cards (the notation A → B means an MP solution in the set A transitions into
a hybrid solution in the set B).
Corollary 2. Adoption of MC with partial postponement can alter the MP firm’s solution to
a hybrid firm solution in the following three ways:
1. Overproduction increases for mass-produced finished goods inventory (FGI) and/or generic
unit inventory when {Lρu , Lρc } → {LH L H
u , Hu , Hu } ;
2. Overproduction decreases for mass-produced FGI and increases for generic unit inventory
when {Hρu , Hρc } → {HH
u };
3. Overproduction decreases for mass-produced FGI when {Hρu , Hρc } → {HLu }.
Therefore, in the first two types of transitions, adoption of MC may lead again to more overpro-
duction. Within (1), it is even possible that overproduction occurs for both mass-produced FGI
and generic units (inventoried for MC) when the solution changes from Lρc to HH
u . In (2), when the
solution changes from Hρc to HH

u , overproduction of FGIs on the MP side gets replaced by that of
generic units on the hybrid side, which is unequivocally better for the environment since the market
is covered in both cases. When the transition is from Hρu to HH
u , however, that effect is counter-
acted by an increase in total sales, rendering the net effect of overproduction on the environment
ambiguous. Only (3) conforms to the naive intuition that adoption of MC decreases overproduc-
tion, but even that case may not be straightforward from an environmental impact standpoint,
because the total sales may increase (see Proposition 14 where we use the LCA developed in §5).
The main difference between the base model and this extended model is how the waiting cost
impacts the stocking quantity of generic units for mass-customized products. Recall that in the base
model, the production of mass-customized products take place after the market size realization,
and hence the production matches the demand. Here, this may not be the case because the generic
units are produced in advance of market size realization. The optimal inventory of generic units
depends on the consumer waiting cost w. In particular, when w > w, the hybrid firm stocks generic

e6
units for the low market size, i.e., qM C = λ∗M C mL . On the other hand, when w ≤ w, the firm stocks
them for the high market size, i.e., qM C = λ∗M C mH . This relationship has important environmental
implications, which we explore next.
C.3. Environmental Impact Comparison under Partial Postponement We compare

the environmental impact of the hybrid firm with that of the MP firm. For this comparison, we
use the same environmental impact metrics described in Section 5 for all finished products. The
only exception is: For leftover generic units, we assume that their production and overproduc-
tion impacts are proportional to 1 − ρ, i.e., ep (1 − ρ) and eo (1 − ρ), to accurately capture the
environmental impact of these unfinished products.
Proposition 14. The following cases fully characterize when adopting MC with partial post-
ponement is a win-win outcome for both firm profitability and environmental impact.
1. The firm offers a high-value product, characterized by r/c ≥ κ2 , and
(a) w ≤ w ∩ f > fρH ∩ El /Es > R1 ,
(b) w > w ∩ f > fρH ∩ El /Es > R2 , or
(c) fρH ≥ f ≥ f H
2. The firm offers a moderate-value product, characterized by κ1 ≤ r/c < κ2 , and
(a) w ≤ w ∩ fρcu > f > fρH ∩ El /Es > R1 ,
(b) w > w ∩ fρcu > f > fρH ∩ El /Es > R2 , or
L
3. The firm offers a low-value product, characterized by r/c < κ1 , and w ≤ wg2 and fρc > f > f H .
We note at the outset that, similar to our base model, adoption of MC can improve the envi-
ronmental impact only if the MP firm’s solution is either Hρu or Hρc and the hybrid firm opts for
either of the hybrid production solutions HH L
u or Hu . Figure 9 illustrates an example (using the
same parameter estimates we used for our base model, along with ρ = 0.75) where the hybrid firm
always stocks the generic units for the high market size. Also noteworthy: Adoption of MC would
never change the solution from Hρi to Lkj .
For high-value products, when f > fρH , Hρu is replaced by HLu when w is high, and by HH
u when
w is low. In either case, the adoption of MC increases the size of the market that gets served, i.e.,
1 > n∗ λρH , while decreasing the overproduction’s environmental impact in the market segments
where the MP firm would serve. The conditions on El /Es reflect this trade-off. Note that when
Hρu is replaced by HH
u , the reduction in overproduction’s environmental impact – if it arises –
is driven by the hybrid firm’s economic incentive to stock generic units (unfinished products) for
MC in place of mass-produced FGI. When Hρu is replaced by HLu , this reduction may be further
amplified by virtue of the hybrid firm stocking generic units for the low market size.

e7
14 000 14 000
12 000 12 000
10 000 10 000
8000 8000
6000 6000
4000 4000
2000 2000
0 0
11 12 13 14 15 11 12 13 14 15

Figure 9 When adopting MC with partial postponement leads to a win-win or win-lose: Superimposed on the
different MP and hybrid firm solutions separated by solid lines, light green (light red) regions represent win-win
(win-lose). In gray regions, the MP and hybrid firms operate the same. (α = 0.5, mH = 87500, mL = 25000,
t = 16.87, c = 5, w = 6, Es = 5.5, El = 4, ρ = 0.75)
For high-value products, when f is moderate, i.e., fρH ≥ f ≥ f , Hρc is replaced by HLu or HH
u .
In either case, the adoption of MC reduces the overproduction’s environmental impact while not
altering the market share. As a result, the total environmental impact decreases. For moderate-value
products, the cases (a), (b) and (c) are akin to the corresponding cases for high-value products.
Finally, for low-value products, the MP firm’s solution can never be Hρu . The condition in the
proposition thus essentially describes the region where Hρc is replaced by either HLu or HH
u .
Figure 10 depicts how ρ alters the win-win region. Clearly, the win-win region shrinks as ρ rises.
The intuition is that higher ρ means higher relative appeal of customization, which penalizes the
lack of variety by the MP firm more (via higher transportation cost). Therefore, it expands the
operationally safer solutions (L regions) for the MP firm, making it more difficult to attain a win-
win outcome. We note that the structure of the win-win region remains generally similar to the
base model, although the sizes of both the win-win region and the hybrid production regions look
similar to the base model only when ρ ≥ 0.7 for the data we use for model calibration.
To demonstrate that the partial postponement model leads to similar policy insights with the
base model, we check how the win-win region changes upon promoting MC, i.e., lowering w. Figure
11 shows an expanded win-win region for a lower w than in Figure 9; that is, promoting MC can
lead to win-win being more likely. This is consistent with what we observed with our base model
(§6.1), which corresponds to full postponement.
Finally, Figures 12-14 illustrate the impact of disposal fee and profitable / costly recycling on
the win-win region, respectively, when MC is implemented through partial postponement. We use
the same parameter estimates as in our base model in these figures. They show that the win-win

e8
(a) ρ = 0.4 (b) ρ = 0.55
(c) ρ = 0.70 (d) ρ = 0.85

Figure 10 Impact of ρ on win-win under the partial postponement model (α = 0.5, mH = 87500, mL = 25000,
t = 16.87, c = 5, w = 6, Es = 5.5, El = 4)

Figure 11 Impact of promoting MC with partial postponement on win-win (α = 0.5, mH = 87500, mL = 25000,
t = 16.87, c = 5, w = 5.5, Es = 5.5, El = 4, ρ = 0.75)
region evolves in the same fashion as in our base model with all three policies — providing further
evidence that partial postponement does not alter our main insights.

e9

Figure 12 Impact of disposal fee for overproduction on win-win under the partial postponement model
(α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4, x = 0.26, ρ = 0.75)

Figure 13 Impact of profitable recycling on win-win under the partial postponement model (α = 0.5,
mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = 0.5, ρ = 0.75)

Figure 14 Impact of costly recycling on win-win under the partial postponement model (α = 0.5, mH = 87500,
mL = 25000, t = 16.87, c = 5, w = 6, Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = −0.5, ρ = 0.75)

e10
C.4. MC Process Utility that Varies with Degree of Postponement Recall from §C.1
that we presume a fixed ideal utility (r invariant with ρ). In this section, we consider a natural
alternative where the effective ideal utility is increasing in ρ. This may stem from, for example,
consumers experiencing an additional utility – proportional to ρ or VoC – from enjoying the process
of MC (Franke et al. 2010). Thus, we introduce an additional term ρa (a > 0) for process enjoyment
to the consumers’ utility function for MC: UM C (θ, pM C ) = (r + ρa) − ρw − pM C for θ ∈ Θ. So, the
effective ideal utility (r + ρa) is now linearly increasing in ρ. The rest of the model remains the
same as in §C.1. Therefore, the MP firm’s solution is the same as in Proposition 12. Here we first
characterize the hybrid firm’s solution. To do so, we define the following expressions and solution
types (using notation with one new superscript: a for additional utility from MC).
. −βc + c + α(β − 1)r + αρ(w − a) L,a . w − a

λL,a
H = , λL = ,
αβρt t
. (α − 1)(β − 1)c + αβ(w − a) H,a . (β − 1)c((α − 1)ρ + 1) + α(−βr + r + βρ(w − a))
λH,a
H = , λL = .
αβt αρt
µtρ(λi,a 2

. ∗ H ) ∗ i,a ∗ i,a ∗ ∗ i,a ∗ ∗
Hi,a
u = n = , λM P = λH , qM P = λH mH , λM C = 1 − n λH , qM C = λM C mi , i = {H, L},
4f
mL tρ(λi,a 2

i,a . ∗ L ) ∗ i,a ∗ i,a ∗ ∗ i,a ∗ ∗
Lu = n = , λM P = λL , qM P = λL mL , λM C = 1 − n λL , qM C = λM C mi , i = {H, L},
4f
r
0,a . ∗ 3
tmL ρ ∗ 1 ∗ mL ∗ ∗
Lc = n = , λM P = ∗ , qM P = ∗ , λM C = 0, qM C = 0 ,
4f n n
r
0,a . ∗ 3
tµρ ∗ 1 ∗ mH ∗ ∗
Hc = n = , λM P = ∗ , qM P = ∗ , λM C = 0, qM C = 0 ,
4f n n
H,a . ∗ ∗ ∗ ∗ ∗
O0 = (n = 0, λM P = 0, qM P = 0, λM C = 1, qM C = mH ) .
These solution types are akin to the ones in §C.2, with the exception of OH,a
0 . The additional
term (ρa) in the MC utility essentially dampens the impact of waiting cost, making the effective
waiting cost w − a. When the effective waiting cost w − a is sufficiently small (or, negative, since
we allow a > w), the firm replaces mass production with mass customization completely, which is
what gives rise to OH,a
0 . In such pure MC solutions, generic units are never produced for the low
market size, because w is sufficiently low, which makes MC very profitable.

We now state the hybrid firm’s solution.
stocking decisions of the hybrid firm in the partial postponement model with process enjoyment.
1. If w ≤ wl , then MC dominates, i.e., the solution is OH,a
0 .

e11
2. Otherwise, if w > wl , MC does not dominate.

(a) For a high-value product (r/c ≥ κ2 ) the solution is
i. HH,a
u when {w ≤ w + a ∩ f > fHH,a },
ii. HL,a
u when {w > w + a ∩ f > fHL,a }, or
a
iii. H0,a
c when f ≤ f H .
(b) For a moderate-value product (κ1 ≤ r/c < κ2 ) the solution is
i. LH,a
u when {wgH1 + a < w < w + a ∩ f > fLH,a },
ii. LL,a
u when {w1 + a < w ∩ f > fLL,a },
iii. L0,a
c when {(w1 + a < w ∩ fLL,a ≥ f ≥ fcu
L,a
) ∪ (wgH1 + a < w < w + a ∩ fLH,a ≥ f ≥ fcu
H,a
)},
iv. HH,a
u when {(w ≤ w2 + a ∩ f > fHH,a ) ∪ (wg1
H H,a
+ a < w ≤ w + a ∩ fcu > f > fHH,a )},
v. HL,a
u
L,a
when {(w1 + a < w ∩ fcu > f > fHL,a ) ∪ (w + a < w ≤ wg1
L
+ a ∩ f > fHH,a )}, or
a
vi. H0,a
c when {f ≤ f H }.
(c) For a low-value product (r/c < κ1 ) the solution is
i. LH,a
u when {wgH1 + a < w < w6 + a ∩ f > fLH,a },
ii. LL,a
u when {w1 + a < w ∩ f > fLL,a },
a a a
iii. L0,a
c
a
when {w3 + a < w ≤ w4 + a ∩ f L ≥ f ≥ f cu } ∪ {w5 + a < w ∩ f L ≥ f ≥ fρc },
iv. HH,a
u when {(w ≤ w2 + a ∩ f > fHH,a ) ∪ (wg1
H H,a
+ a < w ≤ w6 + a ∩ fcu > f > fHH,a )},
v. HL,a
u
L
when {(w1 + a < w ≤ wg2 L,a
+ a ∩ fcu > f > fHL,a ) ∪ (w + a < w ≤ wg1
L
+a∪f >
fHH,a )}, or
a
vi. H0,a
c
a
when {(w ≤ w4 + a ∩ f ≤ f H ) ∪ (w > w4 + a ∩ fρc ≥ f )}.
The overall structure of this solution is similar to the extension in §C.2, and hence the base model.
We have the same product definitions for high-, moderate-, and low-value products. Additionally,
high product value and low variety cost favor the solution Hj,a
i over Lj,a
i , and a lower w increases
the attractiveness of stocking the mass-customized products for the high market size. In this case,
however, a new region OH,a
0 arises as a solution type. In this new solution type, the firm resorts to
pure MC and stocks generic products for the high market size to be customized after the market
size realization. (Note that such pure-MC solutions exist for the base model too, but we rule them
out by imposing a high enough w, an assumption we maintain as is here.)
Corollary 3. Adoption of MC with partial postponement and process enjoyment can alter the
MP firm’s solution to a hybrid firm solution in the following three ways:
1. Overproduction increases for mass-produced finished goods inventory (FGI) and/or generic
unit inventory when {Lρu , Lρc } → {LH,a L,a H,a
u , Hu , Hu };
2. Overproduction decreases for mass-produced FGI and increases for generic unit inventory
H,a
when {Hρu , Hρc } → {HH,a
u , O0 };

e12
3. Overproduction decreases for mass-produced FGI when {Hρu , Hρc } → {HL,a

u }.
We now compare the environmental impact of the hybrid firm with that of the MP firm. We use
the same metrics and assumptions as we do throughout the paper.
Proposition 16. The following cases fully characterize when adopting MC with partial post-
ponement and process enjoyment is a win-win outcome for both firm profitability and environmental
impact.
1. The firm offers a high-value product, characterized by r/c ≥ κ2 , and
(a) w + a ∩ f > fρH ∩ El /Es > R1a ,
(b) w > w + a ∩ f > fρH ∩ El /Es > R2a , or
a
2. The firm offers a moderate-value product, characterized by κ1 ≤ r/c < κ2 , and
(a) w ≤ w + a ∩ fρcu > f > fρH ∩ El /Es > R1a ,
(b) w > w + a ∩ fρcu > f > fρH ∩ El /Es > R2a , or
a
L,a a
3. The firm offers a low-value product, characterized by r/c < κ1 , and w ≤ wg2 and fρc > f > f H .
The result is similar to the one in §C.3 and hence the base model. Figure 15 illustrates the
proposition for different values of a. As expected, higher values of a favor win-win. In addition,
Figure 16 shows how ρ alters the win-win region. As in §C.3, the win-win region shrinks when ρ
increases and the intuition remains exactly the same. Finally, the policy insights also remain the
same as in §C.3, which we illustrate in Figures 17-20.
D. Higher Unit Cost for Mass Customization

We assume in our base model that the unit production cost (c) is the same for both MP and
MC. This assumption simplifies the exposition of our results. Here we extend our base model to
the case with a higher unit production cost for MC. Although there is no hard evidence, MC is
typically thought to cost more than MP, because MC involves much smaller production batches
(even “batches” of one) and a higher variety of manufacturing steps and tasks.
We let the unit production cost of mass-customized products be c+∆, where ∆ > 0, while keeping
the unit production cost of mass-produced products the same at c. We impose two restrictions
on the model parameters for reasons identical to our base model; we assume w > c(β − 1)(1 −
α)/(αβ) − ∆ and w < r − c − ∆. The former condition eliminates the pure MC solution, while the
latter condition rules out MC being surely unprofitable.
.
We have the following solution types, which are analogous to our base model. Let λ′′H = w +
. .
∆ − c(β − 1)(1 − α)/(αβ) /t and λ′′L = (w + ∆)β − (r − c)(β − 1) /t, where β = µ/mL .
µtλ′′2

′′ . ∗ H ∗ ′′ ∗ ′′ ∗ ∗ ′′
Hu = n = , λM P = λH , qM P = λH mH , λM C = 1 − n λH , (17)
4f

e13
(a) Hybrid Firm, a = 0.3 (b) Hybrid Firm, a = 0.8
(c) Hybrid Firm, a = 1.3

Figure 15 Impact of a on win-win under the partial postponement model with process enjoyment (α = 0.5,
mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4, ρ = 0.75)
r
. tµ 1 mH
H′′c
= n =∗ 3 ∗ ∗ ∗
, λM P = ∗ , qM P = ∗ , λM C = 0 , (18)
4f n n
′′2

′′ . ∗ m L tλ L ∗ ′′ ∗ ′′ ∗ ∗ ′′
Lu = n = , λM P = λL , qM P = λL mL , λM C = 1 − n λL , (19)
4f
r
′′ . ∗ 3
tmL ∗ 1 ∗ mL ∗
Lc = n = , λM P = ∗ , qM P = ∗ , λM C = 0 . (20)
4f n n
We now state the hybrid firm’s solution. (All new thresholds are defined in the proof of the
proposition and wi′ = wi − ∆.)
stocking decisions of the hybrid firm when MC has a higher unit cost.
(a) H′′u when f > fH′′ ; or
(b) H′′c when f ≤ fH′′ .
(a) L′′u when w > w1′ and f > fL′′ ;

e14
(a) ρ = 0.4 (b) ρ = 0.55
(c) ρ = 0.70 (d) ρ = 0.85

Figure 16 Impact of ρ on win-win under the partial postponement model with process enjoyment (α = 0.5,
mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4, a = 0.3)

Figure 17 Impact of promoting MC on win-win under the partial postponement model with process enjoyment
(α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4, ρ = 0.75, a = 0.3)
(b) L′′c when w > w1′ and fL′′ ≥ f ≥ fcu

′′
;
(c) H′′u when w ≤ w1′ and f > fH′′ , or w > w1′ and fcu
′′
> f > fH′′ ; or
(d) H′′c when f ≤ fH′′ .

e15

Figure 18 Impact of disposal fee for overproduction on win-win under the partial postponement model with
process enjoyment (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4, x = 0.26, ρ = 0.75,
a = 0.3)

Figure 19 Impact of profitable recycling on win-win under the partial postponement model with process
enjoyment (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = 0.5,
ρ = 0.75, a = 0.3)

(a) L′′u when w > w1′ and f > fL′′ ;
(b) L′′c when w1′ < w < w2′ and fL′′ ≥ f ≥ fcu
′′
, or w ≥ w2′ and fL′′ ≥ f ≥ fc ;
(c) H′′u when w ≤ w1′ and f > fH′′ , or w1′ < w < w2′ and fcu
′′
> f > fH′′ ; or
(d) H′′c when w < w2′ and f ≤ fH′′ , or w ≥ w2′ and f ≤ fc .
It is immediately evident that the solution structure, including the definitions of high-, moderate-
and low-value products is the same as in the base model. Also, consistent with basic intuition, a
higher production cost for MC shrinks the size of the hybrid solution regions with MC, i.e., H′′u
and L′′u . This is depicted in Figure 21, where ∆ = 0 corresponds to the base model.
The following proposition characterizes the win-win region.

e16

Figure 20 Impact of costly recycling on win-win under the partial postponement model with process enjoyment
(α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = −0.5, ρ = 0.75,
a = 0.3)
(a) (b)
Figure 21 Hybrid firm’s solution for (a) ∆ = 0 and (b) ∆ = 0.5, where dashed lines separate low-, moderate-
and high-value product cases. (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6).
Proposition 18. The following cases fully characterize when adopting MC with a higher unit
cost (∆ > 0) is a win-win outcome for both firm profitability and environmental impact.
1. The firm offers a high-value product, defined by r/c ≥ κ2 , and
(a) f > fH and El /Es > R′ , or
(b) fH ≥ f > fH′′ .
2. The firm offers a moderate-value product, defined by κ1 ≤ r/c < κ2 , and
(a) fcu > f > fH and El /Es > R′ , or
(b) fH ≥ f > fH′′ .
3. The firm offers a low-value product, defined by r/c < κ1 , and fc > f > fH′′ and w ≤ w2′ .
Moreover, as ∆ increases win-win region shrinks.
If the cost differential between MP and MC increases, the win-win region shrinks. This is illus-

e17
(a) ∆ = 5% of c (b) ∆ = 10% of c

Figure 22 When adopting MC with a higher unit cost leads to a win-win or win-lose: Superimposed on the
different MP and hybrid firm solutions separated by solid lines, light green (light red) regions represent win-win
(win-lose). In gray regions, the MP and hybrid firms operate the same. Dashed lines separate low-, moderate- and
high-value product cases. (α = 0.5, mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4)
trated in Figure 22. It is clear that the profitability of hybrid production decreases in ∆. Less clear
is how the environmental impact changes. As ∆ increases, the hybrid firm prefers solutions that
employ less MC ; that is, MC takes over less of the regions in which overproduction occurs in the
MP firm’s solution, causing further reduction in the win-win region.
Recall that using our base model, we investigate the following policy ideas: promoting MC,
charging a disposal fee, and recycling (profitable and costly). All our results in §6 regarding these
policies continue to hold trivially. This is because, analytically, this extension amounts to replacing
the ideal utility for mass-customized products with r − ∆ in the base model solutions (i.e., the firm
simply passes on the extra cost to consumers), thus leading to the same policy-related propositions
verbatim. Instead of repeating those results here, we depict the policy results in Figures 23-26 for
∆ equaling 10% of c, which we justify in Appendix B.3.
E. Proofs
Here we provide the proofs of extended results in Appendix C and Appendix D.
. . .
Proof of Proposition 12: Define λρL = (r − c)/ρt, λρH = (r − c(β − 1 + α)/(αβ))/ρt, fρH =
.
λ3ρH µtρ/4, fρL = λ3ρL mL tρ/4, and λρt = (r − c/α)2/ρt. In addition, fρc is defined in the proof of
Proposition 13, and fρcu is the unique f that solves
(λρH )4 µβtρ 3 f 1/3
+ = λρL .
16f 2 21/3 m1/3
L t
1/3 ρ1/3
The proof of this proposition can be obtained from the proof of Proposition 13 by letting w →
(r − c)/ρ. This is because when w is large enough, MC is not profitable. Hence, it is omitted. □
Proof of Proposition 13: The characterizations of λ expressions in the proposition are as follows:
. −βc + c + α(β − 1)r + αρw L . w
λLH = , λL = ,
αβρt t

e18

Figure 23 Impact of promoting MC with a higher unit cost on win-win (α = 0.5, mH = 87500, mL = 25000,
t = 16.87, c = 5, w = 5.5, Es = 5.5, El = 4, ∆ = 0.5)

Figure 24 Impact of disposal fee for overproduction on win-win when MC has a higher unit cost (α = 0.5,
mH = 87500, mL = 25000, t = 16.87, c = 5, w = 6, Es = 5.5, El = 4, x = 0.26, ∆ = 0.5)

Figure 25 Impact of profitable recycling on win-win when MC has a higher unit cost (α = 0.5, mH = 87500,
mL = 25000, t = 16.87, c = 5, w = 6, Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = 0.5, ∆ = 0.5)

e19

Figure 26 Impact of costly recycling on win-win when MC has a higher unit cost (α = 0.5, mH = 87500,
mL = 25000, t = 16.87, c = 5, w = 6, Esτ = 5.425, Elτ = 3.925, τ = 0.15, s = −0.5, ∆ = 0.5)
. (α − 1)(β − 1)c + αβw H . (β − 1)c((α − 1)ρ + 1) + α(−βr + r + βρw)

λH
H = , λL = .
αβt αρt
The characterizations of critical f values are as follows:
. (λi )3 µtρ i . (λiL )3 mL tρ . 2 (β − 1)3

fHi = H , fL = fρc = tλ3ρt ρmL .
4 4 27 (β 2/3 − 1)3
( ( (
. fHH if w ≤ w . fLH if w ≤ w H
. fcu if w ≤ w
fH = f = f cu =
fHL if w > w. L fLL if w > w. L
fcu if w > w.
i
fcu is the unique solution to
(λiH )4 µβtρ 3 f 1/3
= λiL ,

+ 1/3
16f 2 2 mL t ρ
1/3 1/3 1/3
and
( ( (
H L
. . w if ρ > ρ1 , . wg1 if ρ > ρ1 , . wg1 if ρ ≤ ρ1 ,
w = c(−αρ + ρ − 1) + αr /αρ, w1 = L
w2 = w3 = H
,
wg1 if ρ ≤ ρ1 . w if ρ ≤ ρ1 . wg1 if ρ > ρ1 .
( ( (
L L H
. wg2 if ρ < ρ2 , . wg2 if ρ < ρ2 , . wg2 if ρ2 ≥ ρ,
w4 = H
w5 = , w6 =
wg2 if ρ ≥ ρ2 , w if ρ ≥ ρ2 . w if ρ1 ≤ ρ < ρ2 .
Here,
√ √
H . (α − 1)(β − 1)cρ + β + β (c − αr) L .
β + 1 (αr − c)
wg1 =− , wg1 = ,
αβρ αρ
H . (β − 1)(c(β + (α − 1)ρ(β − K1 )) − αβr) L . (β − 1)K1 (c − αr)
wg2 = wg2 = ,
αβρ(K1 − β) αρ(K1 − β)
and
√
. β(c − αr) . β(K1 − 1)(c − αr)
ρ1 = , ρ2 = − .
(α − 1)c (α − 1)c(K1 − β)

e20
It must be that pM C = r − ρw. Thus given pM P , the firm’s expected profit from MC is
ΠM C (qM C , pM C ) = (r − ρw)E[min{qM C , λM C M }] − (1 − ρ)cq − ρcE[min{q, λM C M }],

| {z } | {z }
MC revenue MC cost
where λM C = 1 − nλM P as in the base model. Using this profit function, we can show that qM C =
λM C mH (qM C = λM C mL ) if and only if w < (≥)w. This condition determines whether the firm
stocks for high or low market size in MC. For brevity, we solve only for qM C = λM C mH because
the other case is very similar. Suppose that w < w. Thus Π′ (n, qM P , pM P ) = pM P nE[qM P , λM P M ] −
cnqM P − nf 2 + ΠM C (pM P ). Using the fact that pM P = r − ρt/2λM P and solving for optimal qM P ,
.
we can find qM P = λM P mH (qM P = λM P mL ) if and only if λM P ≤ (>)λρt , where λρt = 2(r − c/α)/ρt.
In the former case, the firm stocks for high market size, while in the latter case the firm stocks for
low market size. The next step is to determine λM P for each of these cases. As in the base model
(and given the firm stocks for high market size in MC), there are four different solution types: 1-2)
utilize both MC and MP, and stock for low (high) market size in MP 3-4) only use MP and stock
for low (high) market size. We assume w > c(β − 1)(1 − α)/(αβ) to eliminate the uninteresting case
where only MC arises in the solution as in the base model. If the solution is 1 (2), we can show
that λ∗M P = λH ∗ H 2 ∗ H ∗ H 2
L , and n = mL tρ(λL ) /4f (λM P = λH , and n = mH tρ(λH ) /4f ). Similarly, if the
p p
solution is 3 (4), λ∗M P = 1/n∗ , and n∗ = 3 tmL ρ/4f (λM P = 1/n∗ and n∗ = 3 tµρ/4f ). It is optimal
for the firm to choose one of these four solutions, whichever results in a higher profit. The profits
of these solutions can be shown to be:
(λH 4 2 2 2
L ) mL t ρ
Π′ (LH
u ) = (r − ρ(w + c))µ − (1 − ρ)cmH + ,
16f
(λH )4 µ2 t2 ρ2
Π′ (HuH ) = (r − ρ(w + c))µ − (1 − ρ)cmH + H ,
16f
r r
′ 0 3 3 f t2 m2L ρ2 ′ 0 3ρ 3 f t2 µ2 ρ2
Π (Lc ) = (r − c)mL − , Π (Hc ) = rµ − cmH − .
2 2 2 2
We can show that the solutions L0c and Hc0 can be optimal only if the optimal interior product
variety solutions, i.e, n, are not feasible when λM P is equal to the unique optimal interior solutions
(which are λH L H H H 2 H
L and λH in solutions Lc and Hc , respectively), i.e, mL tρ(λL ) /4f > 1/λL and
µtρ(λH 2 H
H ) /4f > 1/λH . Using these relationships and comparing the profits above give the solution
for w < w. The case for w ≥ w, where the firm stocks for low market size in MC, can be shown
similarly. Combining these results leads to the proposition. □
Proof of Corollary 2: This can be shown from Proposition 13 by noting that as w → (r − c)/ρ,
the solution converges to the MP firm solution. □
Proof of Proposition 14: Similar to the base model, hybrid firm can improve the environmental

e21
only if the solution is (A) Hρu or (B) Hρc under pure MP but it is either HLu or HH
u under hybrid
strategy.
Now, suppose that r/c ≥ κ2 , and hence product is a high value product. Also assume w < w,
and thus hybrid firm stocks for mH in MC. Noting that fHH < fρH , there are two cases: 1) fρH < f ,
which corresponds to (A) and 2) fHH < f ≤ fρH which corresponds to (B).
1) fρH < f : Under hybrid strategy, the solution is HH
u and under pure MP solution is Hρu (A).
Therefore,
El
E[IHH − IHρu ] < 0 ⇔ > R1 > 0,
u
Es
. µ(1−nρH λρH )
where R1 = (mH −µ)(−1+nρH λρH +ρ(1−nH λH ))
, and nρi and λρi (nji and λji ) are the optimal variety and
H H
market share decisions for MP firm (hybrid firm when it stocks for market size mi in MP and mj
in MC).
2) fHH < f ≤ fρH : Under hybrid strategy, the solution is HH
u while under pure MP, the solution is
Hρc (B). Clearly, E[IHH

u
] < E[IHρc ].
Now suppose that w ≥ w, and hence the hybrid firm stocks for mL in MC. Noting that fHL < fρH ,
there are two cases: 1) fρH < f , which corresponds to (A) and 2) fHL < f ≤ fρH which corresponds
to (B).
1) fρH < f : Under hybrid strategy, the solution is HLu and under pure MP solution is Hρu (A).
Therefore,
El mL (1 − nρH λρH ) − (µ − mL )(nρH λρH − nLH λLH ) .

E[IHLu − IHρu ] < 0 ⇔ > max{ , 0} = R2 .
Es (mH − µ)
2) fHL < f ≤ fρH : Under hybrid strategy, the solution is HLu while under pure MP, the solution is
Hρc (B). Clearly, E[IHLu ] < E[IHρc ].
The cases for moderate and low value products can be shown similarly. Hence, they are
omitted. □
Proof of Proposition 15: The proof can be obtained from the proof of Proposition 13 by allowing
w → w − a. □
Proof of Corollary 3: The proof is similar to the proof of Corollary 2. Hence, it is omitted. □
Proof of Proposition 16: The proof is similar to the proof of Proposition 14. The hybrid firm can
have a lower environmental impact only if the solution of the pure MP firm is (A)Hρu or (B) Hρc ,
and the hybrid firm’s solution is HL,a H,a
u , Hu or OH,a
0 . The conditions in the proposition characterize
these regions.
Now, suppose that r/c ≥ κ2 , and hence product is a high value product. Also assume w < w + a,
and thus hybrid firm stocks for mH in MC (and MP disappears when w ≤ wl < w + a). Noting that

e22
fHH,a < fρH , there are two cases: 1) fρH < f , which corresponds to (A) and 2) fHH,a < f ≤ fρH which
corresponds to (B).
1) fρH < f : Under hybrid strategy, the solution is HH,a
u or OH,a
0 , and under pure MP solution is
Hρu (A). Therefore,
El
E[IHH,a − IHρu ] < 0 ⇔ > R1a > 0,
u Es
. µ(1−nρH λρH )
where R1a = (mH −µ)(−1+nρH λρH +ρ(1−n∗ λ∗ ))
, and nρi and λρi (resp. n∗ and λ∗ ) are the optimal variety
and market share decisions of the MP products of the MP firm (resp. the hybrid firm). Note that
in OH,a ∗ ∗
0 , which arises when w ≤ wl , λ = n = 0
2) fHH,a < f ≤ fρH : Under hybrid strategy, the solution is either HH,a
u or OH,a
0 while under pure MP,
the solution is Hρc (B). Clearly, E[IHH,a
u
] < E[IHρc ] and E[IOH,a ] < E[IHρc ].
0
Now suppose that w ≥ w + a, and hence the hybrid firm stocks for mL in MC. Noting that
fHL,a < fρH , there are two cases: 1) fρH < f , which corresponds to (A) and 2) fHL,a < f ≤ fρH which
corresponds to (B).
1) fρH < f : Under hybrid strategy, the solution is HL,a
u and under pure MP solution is Hρu (A).
Therefore,
El mL (1 − nρH λρH ) − (µ − mL )(nρH λρH − n∗ λ∗ ) .

E[IHL,a − IHρu ] < 0 ⇔ > max{ , 0} = R2a ,
u Es (mH − µ)
where nρi and λρi (resp. n∗ and λ∗ ) are the optimal variety and market share decisions of the MP
products for MP firm (resp. hybrid firm) as before.
2) fHL,a < f ≤ fρH : Under hybrid strategy, the solution is HL,a
u while under pure MP, the solution
is Hρc (B). Clearly, E[IHL,a
u
] < E[IHρc ].
The cases for moderate and low value products can be shown similarly. Hence, they are
omitted. □
Proof of Proposition 17 It can be seen that the solution is a limiting case of our base hybrid
solution, and can be obtained from the proof of Propositon 2 by letting w → w + ∆. Similarly, all
the fi′′ thresholds can be obtained in the same way, i.e. limw→w+∆ fi′ = fi′′ □
Proof of Proposition 18 As mentioned in the proof of Proposition 17, the model is a limiting
case of our base hybrid model. Therefore, the proofs of Part 1, 2 and 3 can be obtained from
the proof of Propositon 3 by letting w → w + ∆. We now prove that the win-win region shrinks
with ∆. In the proof of Propositon 4, we show that as w decreases, the win-win region expands.
Because this new model is the limiting case of the base hybrid model such that w → w + ∆, the
win-win region shrinks. □

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Is Adopting Mass Customization

a Path to Environmentally Sustainable Fashion?

January 20, 2022

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high moderate low variety cost

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3. The Mass Producer Firm

UM P (θ, x, pM P ) = r − pM P − t|x − θ|,

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Π(n, pM P , qM P ) = pM P nE[min{qM P , M λM P }] − (cnqM P + f n2 )

where the expectation is taken with respect to the market size M .

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4. The Hybrid Firm

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4.1. Hybrid Model

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Π′ (n, pM P , qM P , pM C ) = pM P nE[min{qM P , M λM P }] + pM C µλM C − (cnqM P + cµλM C + f n2 )

4.2. Hybrid Analysis

where λM C = 1 − nλM P is the total market share of mass-customized products.

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where p∗M C and qM

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2. For a moderate-value product (κ1 ≤ r/c < κ2 ) the solution is

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5. Environmental Impact Comparison

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(a) MP Firm (b) Hybrid Firm

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(a) MP Firm (b) Hybrid Firm

6.1. The impact of promoting mass customization

This is encouraging from a policy perspective, because reducing w by increasing consumers’

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Proposition 5. As w decreases, the hybrid firm’s environmental impact changes as follows:

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6.2. The impact of disposal fee for overproduction

Π(n, pM P , qM P ) = pM P nE[min{qM P , M λM P }] − cnqM P − xnE[max{qM P − M λM P , 0}] −f n2 ,

Π′ (n, pM P , qM P , pM C ) = Π(n, pM P , qM P ) + (pM C − c)µλM C

Proposition 6. Suppose there is a disposal fee x per unit of overproduction. As x increases,

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(a) MP Firm (b) Hybrid Firm

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6.3. The impact of recycling

Π(n, pM P , qM P ) = [pM P − (1 − τ )s]nE[min{qM P , M λM P }] − (c − s)nqM P − f n2 ,

Π′ (n, pM P , qM P , pM C ) = Π(n, pM P , qM P ) + (pM C − c)µλM C + sτ µλM C .

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(a) MP Firm (b) Hybrid Firm

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(a) MP Firm (b) Hybrid Firm

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Alptekinoğlu, A., C. J. Corbett. 2010. Leadtime-variety tradeoff in product differentiation. Manufacturing

Boston Consulting Group. 2019. Pulse of the fashion industry. http://media-publications.bcg.com/fr

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