Int. J.

Production Economics xxx (xxxx) xxx

Contents lists available at ScienceDirect

International Journal of Production Economics

journal homepage: http://www.elsevier.com/locate/ijpe

What is the right production strategy for horizontally differentiated

product: Standardization or mass customization?
Xiao-Feng Shao
Antai College of Economics and Management, Shanghai Jiao Tong University, 1954 Hua Shan Road, Shanghai, PR China

A R T I C L E I N F O A B S T R A C T

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

1. Introduction
Thanks to technology advances like interactive information tech­
nologies, 3-D printing, robotics and high-speed bespoke supply chains,
we are seeing a new wave of digital customer engagement in
manufacturing and an increasing capability of manufacturers offering
customers mass customized products with unprecedented speed (Sodhi
and Tang, 2017). Mass customization (MC) is a production strategy
focused on the ability of a firm to manufacture a relatively high volume
of product options for a relatively large market that demands person­
alization, mostly through modular design (Engel et al., 2017), agile
manufacturing (Gunasekaran et al., 2018), and integration between
supply chain members (Zhang et al., 2019). It is discussed as a source of
competitive advantage for manufacturers in competition with the
low-cost mass production manufacturers in management literature, and
it is gaining increasing attention in practice by companies in key eco­
nomic sectors such as automobile, clothing, eyeglasses, bicycles, and
computer manufacturing (Salvador et al., 2009; Choi and Guo, 2018).
Mass customization is very much a reality today as major companies like
Dell, Hewlett-Packard, General Motors, and others are experimenting
and also effectively implementing this process in their facilities (Sell­
adurai, 2004).
In many industries, mass production (MP) as the dominant paradigm
is being challenged by mass customization. Accordingly, many
researchers posit that firms which replace mass production with mass
customization will gain a significant competitive advantage. A key
assumption is that mass customized products create higher values for
customers because they deliver a closer preference fit. Mass production
enables manufacturing of a standard product in a large quantity at a low
unit cost. Mass customization, on the other hand, enables firms to pro­
duce enough variety so that nearly everyone finds exactly what he or she
wants at a reasonable price. However, the premium cost that the pro­
duction system incurs for including the flexibility of customization may
sacrifice the cost efficiency that usually is associated with standardiza­
tion. Although successful applications of MC have been vastly reported.
However, firms such as Levi Strauss and Mattel have abandoned these
initiatives, and mass-customizers such as Cmax.com, selling customized
sports shoes, and Reflect.com, selling custom beauty products, have
gone out of business (Mendelson and Parlaktϋrk, 2008a,b).
Therefore, the capability of providing effective customization is not
sufficient per se to assess the value of mass customization (Merle et al.,
2010). In an empirical study conducted by Squire et al. (2006), it is
reported that UK companies make trade-offs between the level of cus­
tomization offered and the manufacturing costs when making the
MP-to-MC transition decisions. Although, mass customization is an
attractive strategy, it cannot be good for any business. Can the higher
revenues from better matching customer preferences with product
specifications compensate for the higher costs of offering a customized

E-mail address: xfshao@sjtu.edu.cn.

https://doi.org/10.1016/j.ijpe.2019.107527
Received 11 September 2018; Received in revised form 21 December 2018; Accepted 17 October 2019
Available online 24 October 2019
0925-5273/© 2019 Elsevier B.V. All rights reserved.

Please cite this article as: Xiao-Feng Shao, Int. J. Production Economics, https://doi.org/10.1016/j.ijpe.2019.107527
X.-F. Shao
product line? Therefore, it is important to explain what factors drive the
beneficial adoption of MC. In this research, we aim to answer the
following questions: when can a manufacturer actually benefit from a
mass customization system? Which level of mass customization capa­
bility should be invested?
To address these questions, we model a monopoly firm’s choice of
production strategy in a market with heterogeneous preferences for
horizontally differentiated products. We develop and compare two
production models: standardization and mass customization. For the
mass customization model, we further address two kinds of production
systems: a low level mass customization system (LMC) with a maximal
capability of offering a limited number of product types and a high level
mass customization (HMC) offering customized product types for each
segment. We find that a high mass customization level is always
accompanied by a higher price, but standardization does not guarantee a
lower price for customers; and a high level mass customization strategy
does not guarantee a larger sales quantity. Our results show that HMC
may not necessarily improve the firm’s payoffs. We develop two effec­
tive decision policies to identify an optimal production strategy. We find
that a standardization strategy is more likely to be preferred when
operating cost is high or product value is low. With small disutility of
type mismatch, LMC is preferred to HMC.
The rest of the paper is organized as follows. In Section 2, we review
the related literature. Section 3 describes the model. The standardization
and the mass customization strategies are analyzed in Section 4 and
Section 5, respectively. In Section 6, we compare the two production
strategies and analyze the impacts of product value and operating cost.
Finally, we draw our conclusions in Section 7.
2. Literature review
The analysis and implementation of mass customization (MC) has
received growing consideration by researchers and practitioners over
the last decade (Fogliatto et al., 2012), and is an important POM related
research trend in the era of big data (Feng and Shanthikumar, 2018).
The operations management literature on mass customization is mainly
focused on whether and how manufacturers can efficiently deliver
customization.
There is a stream of research focused on the decision whether a firm
should turn to a mass customization strategy. It appears that the benefits
companies experienced with mass customization were related to the
market impact and profit factors (Jiang et al., 2006; Li et al., 2015), and
value creation (Merle et al., 2010; Franke et al., 2010). The limits of
mass customization were cost related, including increased material cost,
higher manufacturing cost, lower on-time deliveries, and reduction in
product quality (Liu et al., 2012). Mass customization has the potential
to improve taste alignment with regard to a specific purchased product,
but at the risk of increasing brand dilution. Considering brand-dilution
effects, Cil and Pangburn (2017) prove that there are conditions under
which the firm optimally restricts variety–even when costless (from a
production standpoint). Cavusoglu et al. (2007) discuss the selection of a
customization strategy under competition. They analyze three custom­
ization strategies: mass customization, targeted mass customization, and
product proliferation, and show that firms target only certain customer
segments with customized products when competing firms choose to
customize. From an integrated perspective, Shao (2013) explores
whether the firm should adopt mass customization and how the distri­
bution channel should be configured for custom products. The results
shows that the mixed mass customization strategy dominates the pure
standard product strategy in the centralized system and the
dual-channel strategy is always preferred when mixed mass custom­
ization is adopted. Mendelson and Parlaktϋrk (2008a,b) analyze
whether a firm should adopt mass customization in a market served by a
duopoly. They find that mass customization is beneficial only for a firm
with a sufficiently strong competitive position. Alptekino�glu and Corbett
(2008) study conditions under which a firm that sells standard products
2
International Journal of Production Economics xxx (xxxx) xxx
can coexist with one that sells custom products in a market where cus­
tomers have heterogeneous preferences on a single taste attribute. They
find that the mass producer may survive even when it has higher fixed
cost of production technology or higher marginal cost of production.
Another stream of research related to our research is devoted to the
issue of how to effectively employ mass customization, which includes
operational approaches (Tu et al., 2004), intellectual capital investment
(Zhang et al., 2017) and organizational strategies (Rungtusanatham and
Salvador, 2008; Sandrin et al., 2018). Feng and Shanthikumar (2018)
identify and investigate two specific areas in mass customization,
namely, demand learning and manufacturing. In manufacturing,
modularity and flexibility have been advocated as important principles
to achieve mass customization operationally (Brabazon et al., 2010;
Salvador et al., 2015). Recent research attention in the operations
literature has been paid to demand learning aspects of mass custom­
ization. Learning about customer preferences on product functionalities
or service offerings is an integral part of demand learning. Huang et al.
(2018) develop an analytical framework to study the economic value of
mass customization systems and investigate the interaction between
demand learning (to reduce mismatches between costly supply and
uncertain demand) and preference learning (to reduce mismatches be­
tween product characteristics and customer preferences). Bernstein
et al. (2018) propose a dynamic clustering policy that estimates
customer preferences by adaptively adjusting customer segments
(clusters of customers with similar preferences) as more transaction
information becomes available.
With respect to the literature, the contribution of our paper can be
summarized in the following aspects. First, we incorporate assortment
problem in the model. In current research, little literature considers the
assortment problem in mass customization. Mendelson and Parlaktϋrk
(2008a,b) considered the portfolio of products, however, for ease of
exposition, they just analyze the product number and treat the number
as a continuous variable. Second, we model customers’ utility for hori­
zontally differentiated products in a new way. In a classic horizontal
product-differentiation framework, a consumer’s utility is a decreasing
function of the distance between their ideal taste and the taste defined
by the most closely aligned product the firm offers (Cil and Pangburn,
2017). In our model, we use the coefficient of type mismatch to model
the product value for a second choice. Third, we develop the two deci­
sion policies based on operating cost and product value, respectively. To
the best of our knowledge, this is the first paper that develops such
policies for the choice of production strategy.
3. Model description
We consider a manufacturer’s tradeoff in designing a production
strategy between meeting customer preferences closely by offering
differentiated product types through a mass customization system, and
operating cost-effectively by making a standard product through a mass
production system.
The firm’s unit cost of mass producing a standard product is cs . For
each unit of product produced in a mass customization system, a unit
cost of cm is incurred. There is a difference in operating cost between
mass production and mass customization reflecting differences in pro­
duction setup costs, facility maintenance costs, labor costs, etc. A mass
production system is built primarily for cost efficiency to produce
products in large lot sizes. While a mass customization system is built
primarily for flexibility to satisfy different demand in smaller lot sizes,
which results in increased operation complexity and costs. One of the
main barriers for organizations adopting mass customization has been
the need to achieve a manageable cost structure (Zipkin, 2001). Our
model considers general cost parameters, giving mass production system
a cost advantage. Therefore, we assume that cm > cs .
We model the heterogeneous market by classifying customers into
clusters according to their preferences. As a result, the market consists of
n segments having different tastes for product types which are denoted
X.-F. Shao International Journal of Production Economics xxx (xxxx) xxx

as T ¼ ft1 ;t2 ; …; tn g. Product type refers to the horizontal differentiated 0 1

P
attribute of a product, such as sports shoes with different colors and ice v B dk þ Pi6¼k λik di C cs
creams with different flavors (Shao, 2015). Denote by di the potential p*s ðtk Þ ¼ @ Aþ :
2 dk þ ρ1 i6¼k λik di 2
aggregate customer demand in segment i ​ (i 2 N ¼ f1; 2; ⋯,n}). Cus­
tomers from the same segment have the same favorite product type,
however, they may have different second choices. Without loss of gen­ All proofs are presented in the Appendix.
erality, assume ti is the corresponding first choice of the product type for
The above lemma shows that the optimal price under the standard­
customers from segment iði 2 NÞ. We assume that there is λij ðj 6¼ iÞ per­
ization strategy depends on parameters such as the corresponding size of
centage of customers from segment i who would like to have type the target segment, the potential number of customers from the rest of
tj ðtj 2 TÞ as their second type choice. λij can be explained as customers’ the market having the selected type as a second choice, and the coeffi­
willingness to turn to a second choice. ∂p*s ðtk Þ
cient of type mismatch. According to Lemma 1, we have > 0;
The buying decision that a potential customer makes depends on the ∂dk

product price p and the product value v. We assume that the first choice ∂p*s ðtk Þ ∂p* ðt Þ
P < 0 and s∂ρ k > 0. It suggests that for a given type, either a large
creates a higher value for customers than a second choice because it ∂ λ d
i6¼k ik i

delivers a closer preference fit. Franke et al. (2009) provide empirical
evidence that products customized on the basis of expressed preferences
bring about a significantly higher value for customers than standard
products. For each segment, the intrinsic value of the favorite product
type is v. When the first type choice is not offered for the corresponding
segment, compared to those who purchase their favorite type, customers
who buy a second choice face an issue of disutility due to type mismatch.
Therefore, we characterize the product value associated with a second
choice as ρv, where ρ is a coefficient of type mismatch. To ensure that
customers can have a positive utility from buying a second choice, we
assume that ρ � ρ � 1.
For each segment, we assume customers are heterogeneous in will­
ingness to pay and customer types are uniformly distributed over [0,1].
A θ-type customer is willing to pay θv for a unit of product matching his
first choice and θρv for the second choices, where θ 2 ½0; 1�. Therefore,
the customer’s payoff from buying a first choice is given by μθ ¼ θv p.
However, if the first choice is not offered, the customer’s payoff from
buying a second choice can be expressed as follows: μθ ¼ θρv p.
Each customer maximizes his utility and makes a decision accord­
ingly. Define S as the product assortment. Therefore, the θ-type
customer from segment i will purchases one unit of his first choice
product when θv p > 0; ifti 2 S. Otherwise, the θ-type customer from
segment i who has tj as a second choice will purchases one unit of his
second choice product when θρv p > 0; ifti 62 S; 8tj 2 S.
Once a production system is chosen, the firm decides which specific
product types from T ¼ ft1 ; t2 ; …; tn g to offer in the assortment S and
how much to charge for the product. We assume that a uniform price is
charged for all horizontally differentiated product types in a given
assortment S (i.e., no price discrimination), which is a common practice
in reality, e.g., different flavored yogurt products with the same serving
size sell at the same price.
4. Standardization strategy
With a standardization strategy, the firm responds to the demand by
offering a single product type manufactured by a mass production sys­
tem. Therefore, only customers from one segment could have their ideal
product. Suppose tk is the product type selected by the firm. Given the
product type, the manufacturer decides the product price by maximizing
her profit
h� ps � � ps � X i 6 dk þ Pi6¼k λik di
π s ðps Þ ¼ ðps cs Þ 1 dk þ 1 λ d ;
v ρv i6¼k ik i
target segment, a high coefficient of type mismatch, or a small per­
centage of customers having the selected type as a second choice is more
likely to induce the firm to charge a higher price.
Lemma 2. Under the standardization strategy,
i) p*s ðt1 Þ ¼ ⋯ ¼ p*s ðtn Þ ¼ vþc
2 , when λij ¼ 0ð8i; j 2 NÞ or ρ ¼ 1;
s
ii) when λij ¼ 1ð8i; j 2 NÞ, p*s ðtl Þ � p*s ðtg Þ if dl > dg ðg 6¼ lÞ;
iii) for a given product type tk , p*s ðtk Þ is increasing in ρ; and
P
λik di
iv) denote φk ¼ i6¼dkk ; for a given product type tk , p*s ðtk Þ is decreasing
in φk .
Lemma 2 i) describes two special cases where the price is indepen­
dent of the type offered. In a highly individualized market where no
customers would consider a second choice, the firm sets a fixed price to
maximize the profit from the target segment no matter which type is
selected. In the case where type mismatch does not cause a decrease in
product value, such as cell phones with the same configurations but
different colors, the firm sets the price equal to that in the first case. The
difference between these two special cases is that the firm can sell the
standard product to some customers from the other segments in the
latter case while there is no sales outside the target segment in the
former one. The second part of Lemma 2 illustrates another special case
where customers are always glad to accept a second choice when their
first choices are not offered. It shows that in this case, the price depends
on the specific type that the firm produces. The firm is more likely to
charge a higher price for a more popular type with a larger corre­
sponding target segment.
Part iii) of Lemma 2 shows that a higher coefficient of type mismatch
is likely to induce the firm to charge a higher price. As the coefficient of
type mismatch becomes larger, the firm compensates less for value
reduction due to type mismatch, and therefore will increase the price.
We defineφk as the demand ratio of tk . Part iv) illustrates the role of
demand ratio in pricing decision. It shows that when the demand ratio is
relatively large, the firm tends to decrease the price to attract more
customers outside the target segment.
The firm’s type decision problem under the standardization strategy
is as follows
2
P
32
P
1
7 dk þ ρ i6¼k λik di
maxπs ðtk Þ ¼ 4 v cs 5 :
dk þ 1ρ i6¼k λik di 4v

� �
ps
where 1 v dk is the demand from the segment where the selected
type matches with the first choice of the customers; the aggregate de­ Proposition 1. Under the standardization strategy, the optimal assortment
� �P is
mand from the other segments is 1 ρpvs λik di . 8 8 � � �99
i6¼k P � P
>
> >
> v d þ λ d c d þ 1
λ d >
>>
>
< < j i6¼j ij i s j ρ i6¼j ij i ==
Lemma 1. For a given product type tk , there exists the optimal price *
Ss ¼ tk jk ¼ argmax qffiffiffiffiffiffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi :
>
> >
> dj þ ρ1 i6¼j λij di >
>>
: : ;>
;

3
X.-F. Shao
Proposition 1 provides the optimal policy for the product type de­
cision. According to Proposition 1, it is not necessary that the most
popular type is the optimal one. When there is little disutility of type
n n P oo
mismatch, S*s ¼ tk jk ¼ argmax dj þ λij di . Suppose tl is the most
i6¼j
P P
popular type anddl > dm . We have S*s ¼ ftm g if λim di
i6¼m
dm . Therefore, a less popular type with a larger number of customers
considering it as a second choice may be preferred to a more popular
type with less potential customers from outside the target segment.
When a more popular type is selected, according to Lemma 1, the firm
charges a higher price when there are less potential customers from
outside the target segment, which leads to a lower total demand. A less
popular type may be more effective in improving the firm’s total profit
when the frim faces a larger number of customers considering it as a
second choice, since more demand is achieved due to a lower price.
Proposition 2. Under the standardization strategy,
i) when λij ¼ 0ð8i; j 2 NÞ, S*s ¼ ftk jk ¼ argmaxfdj gg, p*s ¼
ii) when λij ¼ 1ð8i; j 2 NÞ, S*s ¼ ftk jk ¼ argmaxfdj gg, p*s ¼
P
Pρv i2N di þ c2s .
2½ d d ð1 ρÞ�
i2N i k nologies can provide different product variety at different operating
Proposition 2 illustrates two special cases. In the case that λij ¼ 0ð8i;
j 2 NÞ, part i) states that the optimal type is the one with the largest
corresponding target segment. One interesting observation from part ii)
is that, when λij ¼ 1ð8i; j 2 NÞ, it is optimal to choose the same type as
when λij ¼ 0ð8i; j 2 NÞ. The results are in line with expectation. To be
specific, when λij ¼ 0ð8i;j 2 NÞ, that is, no customers would turn to other
types when their first types are not offered, the firm can only reach
customers from the targeted segment. Therefore, the most popular
product type enables the firm to have the largest potential demand.
When λij ¼ 1ð8i; j 2 NÞ, that is, all customers would consider other
choices when their first types are not offered, the firm can reach cus­
tomers from the whole market. Given the price ps , the sale quantity Q ¼
� �P � �
1 ρpvs di þ ρpvs pvs dk is increasing in dk . Therefore, type tk with the
corresponding larger dk improves the firm’s total profit. However, the
product prices in the two special cases are different. When λij ¼ 1ð8i;
j 2 NÞ, the firm has the incentive to attract customers from the rest
segments who are willing to pay less due to type mismatch. Therefore, as
shown in part ii), a lower price is charged.
5. Mass customization strategy
In a mass customization strategy, product proliferation makes it
impossible for companies to cost-effectively provide a large degree of
product customization in a mass production system (Shao and Ji, 2008).
Therefore, a mass customization system is usually adopted, in which the
firm applies agile technology to provide product variety and custom­
ization at a cost higher than in the mass production system.
Denote Sm as the assortment that the firm offers in mass custom­
ization strategy. Define K ¼ fjj8tj εSm g and K ¼ fjj8tj 62 Sm g. Given Sm ,
the firm’s profit function is as follows,
h�
pm �X � pm � X X i
π m ðpm Þ ¼ ðpm cm Þ 1 dj þ 1 λjk dj ;
v j2K ρv k2K
j2K
� �P
where 1 pm
dj is the demand from the segments where the product
v
j2K
� �P P
types match with the customers’ first choices and 1
the demand from the segments where the first choices are not offered in
the mass customization system.
International Journal of Production Economics xxx (xxxx) xxx
Lemma 3. Under the mass customization strategy, for a given assortment
Sm , there exists the optimal price
P P P
cm v j2K dj þ λjk dj
p*m ¼ þ P Pj2K Pk2K :
2 2 j2K dj þ 1ρ j2K k2K λjk dj
λil di > dl Based on Lemma 3, it is easy to verify that for a given Sm , if K 6¼ ∅,
i6¼l
then the optimal price increases in ρ and decreases in λjk . It is interesting
that ρ and λjk have different impacts on the optimal price. Whenρ in­
creases, the products offered in the assortment would be of a higher
value to the segments without mass customized products offered. Thus,
the firm can charge a higher price to make a higher profit. However,
when λjk increases, the corresponding segment where mass custom­
ization service is not offered becomes more important to the firm
because more customers from this segment would consider to choose a
product type from the given assortment. Therefore, the firm would
lower the price to sell more products to make a higher profit. From
Lemma 3, we can also find that the optimal price would increase when
the number of types offered in the mass customization assortment in­
vþcs creases. It implies that customers in those segments where mass cus­
2 ;
tomization service is offered have to pay a higher price when the firm is
going to provide mass customization service for more segments.
Usually, mass customization systems with different flexible tech­
costs. We now consider two mass customization systems with different
customization levels. The firm can adopt a production system with a low
mass customization level (LMC) which can only offer a maximal number
of r options for the market at a unit production cost of clm . . In a system
with a high mass customization level (HMC), the firm can offer
customized options for each segment at a higher cost of chm , i.e., chm > clm .
We assume that r is large enough and the customers can always find their
first choices or second choices in a given assortment with r different
P
product types. Therefore, λjk ¼ 1 when jKj ¼r. The following propo­
k2K
sition characterizes the structure of the optimal assortment and pricing
decisions in MC.
Proposition 3. Define K1 ; K1 ⊂N, K1 [ K1 ¼ N and K1 \ K1 ¼ ∅. Assume
jK1 j ¼ r anddj > dg ð8j 2 K1 ;g 2 K1 Þ. Under the mass customization strategy,
i) if a system with a low mass customization level is adopted, then
P
� � cl v j2N dj
S*m ¼ tj j8j 2 K1 and p*m ¼ m þ P P ;
2 2 j2K1 dj þ 1ρ j2K 1 dj
ii) if a system with a high mass customization level is adopted, then
chm þ v
S*m ¼ S ¼ ft1 ; t2 ; …; tn g and p*m ¼ :
2
Proposition 3 states that the firm’s profit achieves a maximum with
respect to the maximal possible number of product types in both sys­
tems. The optimal number of types offered in the product assortment is r
in the LMC system, and n in the HMC system. Part i) shows that the
optimal assortment includes the r most popular types in the LMC system.
It is straightforward that the firm should provide variety as much as
possible in mass customization, since a large assortment has the po­
tential to improve type alignment, but does not increase cost from a
production standpoint. From Proposition 3ii), we can find that the
optimal price in the HMC system is independent of the market seg­
pm
λjk dj is mentation. However, in the LMC system, the optimal price depends on
ρv
j2K k2K the way how the market is segmented. In the HMC system, the firm can
make the optimal profit with the highest price by satisfying the cus­
tomers with the right types. While in the LMC system, when the market
4
X.-F. Shao International Journal of Production Economics xxx (xxxx) xxx

where first types are not covered in the assortment is large, the retailer the two mass customization systems and a high coefficient of type
has the incentive to lower the price to attract more customers who mismatch are more likely to results in a larger sale quantity in the LMC
would choose types in a given assortment as their second choices. system. We find that the firm can always sell more products in the LMC
system when ρ ¼ 1. It implies that if there are enough choices and
6. Standardization vs. mass customization decision people can always find a type similar to their ideal one, then LMC
strategy is preferred to HMC strategy.
P P
In this section, we compare the optimal outcomes of the mass cus­ dj dj
Proposition 6. Define α ¼ P d þj2N1P d , β ¼ d þPj2N λ d , and γ ¼
tomization model with the standardization model. We use subscripts m P j2K1 j ρ j2K1 j k i6¼k ik i
d
and s to represent the mass customization model and the standardization Pj2N j .
d þ1
k λ d
i6¼k ik i
model, and use superscripts h and l to refer the high level mass cus­
ρ

tomization system and the low level mass customization system, � qffiffi �
pffiffiffi
respectively. i) Compared to SD strategy, if clm < v α α, then providing
γ
αγ
β þ cs
�
Proposition 4. i) The price in the HMC system is always higher than in the
a LMC service increases the profit (i.e., πlm > π s ); if chm < v 1
LMC system and the SD system, that is, ph* l* h* *
m > pm and pm > ps .
pffi
�
þ pcsffiγ, then providing a HMC service increases the profit (i.e.,
γ
ii) The firm charges a higher price in the LMC system than in the SD β
0 1
P P πhm > πs ).
B dk þ i6¼k λik di dj C
system if clm cs > v@ 1P P j2NP A, that is, pl*
m > pffiffiffi l
ii) Compared to LMC strategy, if chm � vð1 αÞ þ pcmffiαffi, then providing a
1
dk þ ρ λ d
i6¼k ik i
dþ
j2K1 j ρ
d
j2K1 j

HMC service increases the profit (i.e., πhm � π lm ).

p*s ; otherwise,pl* *
m < ps .
iii) In the case with ρ ¼ 1, the LMC system is always preferred to the HMC
The results in Proposition 4 states that a high customization level is
system (i.e., πlm > πhm ); if clm > v vpcffiffis , SD strategy is preferred (i.e.,
always accompanied by a higher price, but standardization does not β

guarantee a lower price for the customers. Part i) shows that customers πs > πlm > πhm ).
who can get their first choices in the case that the firm adopts a stan­
Proposition 6 suggests that the main drivers behind the optimal
dardization strategy or a mass customization strategy offering a limited
production system include parameters such as the operating costs, the
type choices have to pay more for their favorite types when the firm
segment sizes and the coefficient of type mismatch. Part (i) of the
turns to a more flexible production system that could manufacture all
proposition shows when chm (or clm ) is low and dk is small, it may be
product types. It indicates that customers from the target segments are
optimal to adopt a mass customization strategy. However, it may not be
always hurt when the firm is adopting the HMC strategy to provide
optimal when cs is low and dk is large enough. It suggests that the firm
customization service for all segments. Part ii) shows that given the
now has a stronger incentive to adopt a standardization system. Part (ii)
other parameters, there exists a threshold value of cost difference be­ P
tween LMC and SD. If the cost difference is larger than the threshold shows that when chm is low, dj is small and ρ is low, it is optimal to
j2K1
value, a mass customization strategy always results in a higher price.
provide a HMC service if the firm decides to adopt a mass customization
However, if the cost difference is smaller than the threshold value, mass
strategy. Therefore, it implies that for products that are of equal popu­
customization can actually lower the price. In this case, more segments
larity in types and will cause a large depreciation in value due to
can have their first choices at a lower price.
mismatch, a HMC system should be implemented if the difference in
We now examine whether the firm can sell more products by
operating cost is not significant. However, a LMC system may be
adopting HMC strategy. Denote Q as the realized market demand, i.e.,
preferred if there exist some dominate segments, different types are of
the firm’s sales quantity. The following proposition characterizes the
the equal value to customers, and there is a significant difference in
impact of mass customization on the demand.
P operating cost. Part iii) provides a special case where ρ ¼ 1. In this case,
dj
Proposition 5. i) If vv cchs � dj2N , then the firm can sell more products HMC strategy will never be an optimal choice.
m k

under SD strategy than under HMC strategy, that is, Qs � Qhm ; Proposition 6 can serve as a decision policy in making such a deci­
sion. The first step in the decision is to determine whether SD strategy is
P
d þ1
P
d a good decision. According to part i) of Proposition 6, the optimal pro­
chm j2K1 j ρ j2K1 j
ii) if clm
� P
d
, then the firm can sell more products under LMC duction strategy would be SD if the following conditions are satisfied:
j2N j � pffiffiffi � � �
qffiffi pffi
strategy than under HMC strategy, that is, Qlm � Qhm . clm > v α β þ cs αγ and chm > v 1
αγ
þ pcsffiγ. If the above condi­
γ
β

Proposition 5 provides an interesting result that HMC strategy does tions cannot be satisfied, then a mass customization strategy would be
not guarantee a larger sales quantity for the firm. Customers could get optimal. A second step should be taken as shown in part ii) of Proposi­
their first choices when the firm adopts a production system offering a tion 6 to determine which level of mass customization is better. Ac­
high level mass customization service, however, they have to pay more, cording to part ii), the optimal production strategy would be HMC if the
which is reflected in Proposition 4. Therefore, HMC strategy could be a following condition is satisfied: chm � vð1
pffiffiffi l
αÞ þ pcmffiαffi. Otherwise, LMC is
double-edged sword. Producing mass customized products for the whole
the optimal one.
market means a larger potential demand for the firm. However, a higher
We now further analyze the impact of product value on the pro­
price caused by a higher operating cost may imply that more customers
duction decision.
are likely to choose not to buy. Part i) shows the condition that the firm
sells more products using a SD system instead of a HMC system. A Proposition 7. For the given parameters cs ; clm and chm ,
relatively low standardization operating cost, a relatively high mass
8 9
customization cost, and a dominate segment are more likely to lead to >
> pαffi h pcsffiffi>
>*
= ch pclmffi
the result that the firm could not increase sales quantity by offering mass <cl cs γ cm γ
i) when min pffiαffi , the firm’s optimal production strategy
m m
pffiffi ; pffi
customized products for the whole market. Part ii) further illustrates the >
> α
αγ
β 1 β > 1
γ
>
α
: ;
condition that more products will be sold in the LMC system than in the
HMC system. In this case, a large difference in operating cost between is as follows

5
X.-F. Shao International Journal of Production Economics xxx (xxxx) xxx

8 rffiffiffi 9
8
> α h cs To illustrate the impacts of different parameters, we next conduct
>
> > l
<cm cs cm pffiffi> >
>
>
> γ γ= numerical analysis. In the examples reported in Table 1, we consider
> SD; if v < min pffiffiffiffiffi ; pffiffi
>
>
> >
> αγ γ> > that the market consists of 10 segments with different tastes for the
>
> : α 1 ;
>
> 10
P
β β
>
>
>
> firm’s product types ti ði ¼ 1; 2; ⋯10Þ, and fix the total demand D ¼
>
> 8 rffiffiffi 9 i¼1
> α h cs > cl
< > l
<cm cs γ cm pffiγffi>
> = chm pmffiffiffi di ¼ 105: We assume that d1 � d2 � d3 � ⋯ � d10 and the LMC system
α; can make at most 5 product types. To analyze the impact of each
>
> LMC; if min p ffi ffi ffi ffi
ffi ; p ffi ffi � v < pffiffiffi
> > αγ γ> 1 α
>
>
>
>
>
: α 1 >
; parameter, we provide 7 groups of instances. In each group, only one of
> β β
>
>
>
> the parameters in ðv; cs ; clm ; chm ; ρ; λ; fdi gÞ is changed at a time to see the
>
>
>
> cl effect of the altered parameter. For simplicity, we assume that λij ¼ λ.
>
> chm pmffiffiffi
>
>
: HMC; if v �
α
pffiffiffi Therefore, according to Propositions 1 and 3, S*s ¼ ft1 g, Sl*
m ¼ ft1 ; t2 ; t3 ;
1 α t4 ; t5 g and Sh*
m ¼ ft1 ; t2 ; ⋯; t10 g. We define the percentage change in the
firm’s profit to investigate the impact of production strategy. Specif­
8 9 ically,
>
> >
<cl c pffiα ch pcsffiffi>
= ch pclmffi
ii) when min � 1 pffiααffi , the firm’s optimal production strategy
m s γ m m
pffiffi ; pffi
γ

1 β >
αγ γ
>
> α β >
: ;

� � � � �� � �
max π *s ; π l* h*
m ; πm sum π*s ; πl* ; πh* max π*s ; πl* ; πh* min π *s ; π l* ; πh* max π*s ; πl* h*
m ; πm min π*s ; π l* ; πh*
minðπ %Þ ¼ � m m � m m � m m � 100%; maxðπ%Þ ¼ � m m � 100%;
sum π*s ; πl*
m ; πm
h* max π*s ; πl*
m ; πm
h* min π*s ; πl*
m ; πm
h* min π*s ; πl*
m ; πm
h*

is as follows where minðπ %Þ and maxðπ%Þrepresent the possible minimum and

8 rffiffiffi 9 maximal profit performance improvement among the three different
8
>
> l α h cs
cm pffiffi> > production strategies.
>
> <cm cs
γ=
>
>
> SD; if v < min
γ
pffiffiffiffiffi ; pffiffi From Table 1, when ρ is relatively low (e.g., ρ ¼ 0:7), the optimal
>
>
>
>
>
>
>
: α
αγ
1
γ> >
; strategy for the firm is HMC. However, when ρ is high enough (e.g., ρ ¼
>
< β β 0:9), LMC becomes the optimal one. The instances in G1 show that given
>
> 8 rffiffiffi 9: the other parameters, HMC is attractive when the mismatch coefficient
> α h cs >
> > is low, and is not a good choice when the different types are of the
l
>
> >
<cm cs γ m pffiγffi> c =
>
>
>
>
> HMC; if v � min pffiffiffiffiffi ; pffiffi similar value to the customers. In Group 2, the changing parameter is λ.
: > α γ γ >
>
: α 1 >
; If λ is relatively small, the firm will lose a large portion of potential
β β
customers by adopting SD strategy. As Table 1 shows, in this case, HMC
or LMC is better than SD. However, we find SD can be superior to both
HMC and LMC when λ is high enough (e.g., λ ¼ 0:95 in Example 6).
Proposition 7 provides another decision policy which is based on the Examples in Groups 3, 4 and 5 demonstrate the impact of the operating
product value. It shows that SD strategy should be adopted for products costs on the firm’s decision. The results show that the effectiveness of the
with low values. For products with high values, HMC strategy is production strategy is determined by the corresponding operating costs.
preferred. There are two cases discussed in Proposition 7. First, if the In Group 6, we examine the impact of product value on the firm’s de­
lower bound of product value for the HMC system is higher than the cision. It indicates that when the product is of a high value, the firm is
upper bound of product value for the SD system, there are three possible more likely to adopt HMC strategy. The final group shows that HMC is
strategies. In the region between the upper bound of SD and the lower preferred when the market is evenly segmented (Example 19); SD is
bound of HMC, a LMC system should be adopted. Second, if the lower preferred when there is a dominate segment and the other segments are
bound of product value for the HMC system is lower than the upper of a relatively small size (Example 20); and LMC is preferred when the
bound of product value for the SD system, there are only two possible demand from a few segments accounts for the most part of the demand
strategies. In this case, LMC will never be an optimal strategy. According (Example 21).
P
to Proposition 7, the upper and the lower bounds of product value for the Figs. 1 and 2 depict the impacts of dj and ρ. As shown in Figs. 1a)
j2K1
production systems are determined by parameters such as the operating and Figure 2a), SD is the optimal strategy in the upper area and HMC is
P
costs (cs ; clm and chm ), the segment sizes ( dj ;dk ), customers’ willingness preferred in the middle area. However, the strategy for the bottom part
j2K1
needs to be further determined. As shown in Figs. 1b) and 2b), for a
to have a second choice (λ) and the coefficient of type mismatch (ρ).
cl pffi given clm , if chm is located in the upper area, LMC is preferred; otherwise,
chm pmffi cl cs α chm pcsffiffiγ
Define vlower ¼ 1 pffiααffi , vupper1 ¼ m pffiαffiγ γ , and vupper2 ¼ pffi . We have HMC is the optimal strategy. Fig. 1b) shows that the upper bound value
1
γ
α P
of chm decreases in dj , which means that for a given chm , the advantage
β β
∂vlower ∂v ∂vupper2 ∂vlower ∂vupper1 ∂vupper2 ∂vupper1
∂
P
d
> 0, ∂upper1
dk > 0, ∂dk > 0, ∂ρ > 0, ∂ρ > 0, ∂ρ > 0, ∂λ > j2K1
j2K1 j
∂v
of HMC over LMC will diminish as the demand becomes more central­
0, and upper2
∂λ > 0. Therefore, given the operating costs of different pro­ ized in a few segments. Fig. 2 shows that the upper bound value of chm
duction systems, a higher product value is required to justify HMC decreases in ρ. It implies that the advantage of HMC over both SD and
strategy in a market with more centralized demand; a higher product LMC is diminishing as ρ increases.
value is required to justify LMC strategy when the demand in the Figs. 3 and 4 further illustrate the impacts of different parameters on
dominate segment increases or when customers’ willingness to buy a the production strategy. Fig. 3a) shows that when
P
dj < 150, vlower <
second choice increases; and a higher product value is required to justify j2K1
both LMC and HMC when the coefficient of type mismatch increases. minðvupper1 ; vupper2 Þ. According to part ii) of Proposition 7, LMC is not

6
X.-F. Shao International Journal of Production Economics xxx (xxxx) xxx

Table 1
Comparison of SD, LMC and HMC.
{v; cs ; clm ; chm ; ρ; λ} D ¼ 150 SD LMC HMC Decision Impact

{d1 ; d2 ; d3 ; d4 ; d5 ; d6 ; d7 ; d8 ; d9 ; d10 } p*s π*s pl*

m πl*
m ph*
m πh*
m
Strategy maxðπ%Þ minðπ%Þ

G1 {20, 5, 7, 8,0.7,0.7} {15,14,13,12,11,10,9,8,7,6} 9.93 127.53 12.10 158.63 14.00 189.00 HMC 48.20% 19.15%
{20, 5, 7, 8,0.8,0.7} {15,14,13,12,11,10,9,8,7,6} 10.82 158.78 12.63 182.29 14.00 189.00 HMC 19.03% 3.68%
{20, 5, 7, 8,0.9,0.7} {15,14,13,12,11,10,9,8,7,6} 11.68 189.44 13.09 203.21 14.00 189.00 LMC 7.52% 7.27%
G2 {20, 5, 7, 8,0.8,0.75} {15,14,13,12,11,10,9,8,7,6} 10.80 167.26 12.63 182.29 14.00 189.00 HMC 13.00% 3.68%
{20, 5, 7, 8,0.8,0.85} {15,14,13,12,11,10,9,8,7,6} 10.77 184.23 12.63 182.29 14.00 189.00 HMC 3.68% 2.59%
{20, 5, 7, 8,0.8,0.95} {15,14,13,12,11,10,9,8,7,6} 10.75 201.21 12.63 182.29 14.00 189.00 SD 10.38% 6.46%
G3 {20, 5, 5.5, 8,0.7,0.85} {15,14,13,12,11,10,9,8,7,6} 9.86 146.90 11.35 208.75 14.00 189.00 LMC 42.10% 10.45%
{20, 5, 6.5, 8,0.7,0.85} {15,14,13,12,11,10,9,8,7,6} 9.86 146.90 11.85 174.57 14.00 189.00 HMC 28.66% 8.26%
{20, 5, 7.5, 8,0.7,0.85} {15,14,13,12,11,10,9,8,7,6} 9.86 146.90 12.35 143.45 14.00 189.00 HMC 31.76% 28.66%
G4 {20, 5, 7, 7.5,0.8,0.8} {15,14,13,12,11,10,9,8,7,6} 10.79 175.74 12.63 182.29 13.75 205.08 HMC 16.69% 12.50%
{20, 5, 7, 8.0,0.8,0.8} {15,14,13,12,11,10,9,8,7,6} 10.79 175.74 12.63 182.29 14.00 189.00 HMC 7.54% 3.68%
{20, 5, 7, 8.5,0.8,0.8} {15,14,13,12,11,10,9,8,7,6} 10.79 175.74 12.63 182.29 14.25 173.58 LMC 5.02% 3.72%
G5 {20, 5.0, 7, 8,0.8,0.9} {15,14,13,12,11,10,9,8,7,6} 10.76 192.72 12.63 182.29 14.00 189.00 SD 5.72% 1.97%
{20, 5.5, 7, 8,0.8,0.9} {15,14,13,12,11,10,9,8,7,6} 11.01 176.34 12.63 182.29 14.00 189.00 HMC 7.18% 3.68%
{20, 6.0, 7, 8,0.8,0.9} {15,14,13,12,11,10,9,8,7,6} 11.26 160.70 12.63 182.29 14.00 189.00 H MC 17.61% 3.68%
G6 {15, 5, 7, 8,0.8,0.8} {15,14,13,12,11,10,9,8,7,6} 8.71 96.57 10.35 85.93 11.50 85.75 SD 12.62% 12.39%
{20, 5, 7, 8,0.8,0.8} {15,14,13,12,11,10,9,8,7,6} 10.79 175.74 12.63 182.29 14.00 189.00 HMC 7.54% 3.68%
{25, 5, 7, 8,0.8,0.8} {15,14,13,12,11,10,9,8,7,6} 12.86 259.29 14.91 288.03 16.50 303.45 HMC 17.03% 5.35%
G7 {20, 5, 7, 8,0.8,0.8} {12,11,11,11,11,10,10,10,10,9} 10.73 172.29 12.46 174.46 14.00 189.00 HMC 9.70% 8.33%
{20, 5, 7, 8,0.8,0.8} {28,12,11,11,10, 8, 7, 7, 6, 5} 11.03 191.11 12.77 188.62 14.00 189.00 SD 1.32% 1.11%
{20, 5, 7, 8,0.8,0.8} {30,14,14,14,13, 4, 4, 4, 4, 4} 11.07 193.53 13.05 201.01 14.00 189.00 LMC 6.36% 3.87%

Note: SD ¼ "standardization”, LMC ¼ "low level mass customization”, HMC ¼ "high level mass customization".

P
considered. However, when dj > 150, vlower > minðvupper1 ; vupper2 Þ. As appliances by Haier. In response to growing individualization of demand
j2K1
in the increasingly competitive market, more and more companies are
shown in Fig. 3a), LMC is an optimal strategy in the middle region. And considering mass customization as a new production strategy to enhance
P
in this case, the lower bound of product value for HMC increases as dj competitive advantage and planning to transit to a mass customization
j2K1
system. In this paper, we analyze the standardization vs. mass custom­
increases. Therefore, to justify HMC, the product should be of a higher
ization decision. Specifically, we develop and compare two kinds of
value. We find that the upper bound of product value for SD increases in
production models for a market with multiple segments with hetero­
dk in Fig. 3b). Therefore, to justify LMC, the product should be of a
geneous preferences for a horizontally differentiated product.
higher value. Fig. 4a) shows that both the upper bound for SD and the
We have the following interesting results. First, a high mass cus­
lower bound for HMC increase in ρ, which means that the advantage of
tomization level is always accompanied by a higher price, but stan­
MC strategies is diminishing as customers significantly discriminate
dardization does not guarantee a lower price for the customers. In fact,
between the first choice and the second choice. Finally, we find the
customers from the original target segments have to pay more when the
parameter λ has a similar impact on product strategy as dk .
firm tries to offer mass customization service for more segments. Second,
a high level mass customization strategy does not guarantee a larger
7. Conclusion
sales quantity for the firm. The manufacturer can sell more products
using a standardization system instead of a high level mass custom­
Consumers are increasingly demanding products that closely match
ization system when there is a dominate segment and the operating cost
their individual preferences and advances in manufacturing and infor­
difference between the two system is large. And more products can be
mation technologies make it possible to satisfy this demand. (Mendelson
sold in the LMC system than in the HMC system under the scenario with
and Parlaktϋrk, 2008a,b). Mass customization has been emerging in a
a large cost difference between the two mass customization systems and
variety of consumer product sectors, including personal computers by
a high coefficient of type mismatch. Third, the main drivers behind the
Dell, running shoes pioneered by Adidas AG and Nike Inc and household
optimal production strategy include parameters such as the operating

cml, cmh cmh

SD LMC

HMC

HMC
HMC or LMC

j K1 jd d
j K1 j

a) Step 1 b) Step 2

Note: We fix = 12, = 5, j

d
N j
= 200, = 30, = 0.7, = 0.9 in Step 1. In Step 2, we fix = 6.5

Fig. 1. Impact of market segmentation on production strategy.

7
X.-F. Shao International Journal of Production Economics xxx (xxxx) xxx

cml, cmh cmh

SD
LMC

HMC

HMC

HMC or LMC

a) Step 1 b) Step 2

Note: We fix , in Step 1. In Step 2, we fix

Fig. 2. Impact of ρ on production strategy.

v v
HMC

HMC
LMC

LMC

SD
SD

j K1 jd dk

a) Impact of 1
b) Impact of

Note: We fix = 5, = 7, = 8, = 200, = 0.7, = 0.9. To illustrate the impact of , we fix = 30 in

1

Fig. 3. Impact of market segmentation on production strategy.

v v
HMC

HMC
LMC
LMC

SD
SD

a) Impact of b) Impact of

Note: We fix = 5, = 7, = 8, = 200, = 150, = 40. To illustrate the impact of , we fix = 0.8 in
1

Fig. 4. Impact of ρ and λ on production strategy.

costs, the segment sizes and the coefficient of type mismatch. A two-step
decision policy based on the operating costs can be employed to make
the standardization vs. mass customization decision. Fourth, given the
cost parameters, a decision policy based on the product value can serve
as another guide for the manufacturer. A standardization strategy
should be adopted for products with low values. For products with high
values, a high level mass customization strategy is preferred.
This research can be extended in a number of possible ways. Beyond
the scope of our current analysis is the potential impact of mass cus­
tomization on customers’ buying behavior. In our study, we have no
consideration for the behavior changes of the customers in the mass
customization environment. Allowing customers to participate in the

8
X.-F. Shao International Journal of Production Economics xxx (xxxx) xxx

design process has the “I designed it myself” effect, which creates eco­ competition and cooperation is left as an interesting topic for future
nomic value for the customers (Franke et al., 2010). It would be inter­ research.
esting to incorporate customer behavior-based analysis into our model
in the future. Throughout this research, we considered a monopoly firm. Acknowledgement
It is possible to observe horizontal competition and vertical cooperation
in the bespoke supply chain. The interaction within the supply chain will This research has been supported by the Natural Science Foundation
definitely affect the decision. An extended analysis of supply chain of China (Grant no. 71372106, 71572106, and 71632008).

Appendix

h� � � �P i P
2 2 λ d
Proof of Lemma 1. The firm’s profit function is πs ðps Þ ¼ ðps cs Þ 1 pvs dk þ 1 ρpvs λik di . We have ∂ π∂ps ðp
2
sÞ
¼ 2dk
v
i6¼k ik i
v < 0. Therefore,
P i6 k
s
vðdk þ i6¼k λik di Þ cs
¼
*
π s ðps Þ is concave in ps , and we can obtain ps ¼ � � þ 2 from the first order condition.
1
P
2 dk þρ λ d
i6¼k ik i

Proof of Lemma 2. i) According to Lemma 1, when λij ¼ 0ð8i; j 2 NÞ or ρ ¼ 1, we have p*s ¼ vþc s
​ ð8k 2 NÞ. ii) When λij ¼ 1 ð8i;j 2 NÞ, we have p*s ¼
P P P2 P P
ρv di p * v d v d ∂p* ðt Þ vðdk þ i6¼k λik di Þ λ d
þ c2s and ∂dsk > 0. Ifdl > dg ðg 6¼ lÞ, we p*s ðtl Þ ¼ 2½P d d ð1 ρÞ� þ c2s > p*s ðtg Þ ¼ 2½P d d ð1 ρÞ� þ c2s . iii) s∂ρ k ¼ i6¼k ik i
ρ ρ
> 0. There­
∂ i i
P P
2½ di dk ð1 ρÞ� i l i g 2ðd k ρ þ λ d Þ2
i6¼k ik i
P
λik di ∂p* ðt Þ
fore, p*s ðtk Þ is increasing in ρ. iv) Denote φk ¼ i6¼dkk . We have p*s ðtk Þ ¼ ρ2ðvð1þφ kÞ
þ cs . Therefore, ∂sφ k ¼ 2ðvρρð1 ρÞ
< 0. Thus, p*s ðtk Þ is decreasing in φk .
" P ρþφk Þ 2 #2 P k þφk Þ2
dj þ λij di dj ρþ i6¼j λij di
Proof of Proposition 1. The firm’s profit function is πs ðtj Þ ¼ d ρþPi6¼j λ d ρv cs 4ρv . Simplify the profit function, we get πs ðtj Þ ¼
2 � � 32 j i6¼j ij i � �
P P P P
ðdj þ i6¼j λij di Þv dj þ1ρ λij di cs ðdj þ i6¼j λij di Þv dj þ1ρ λij di cs
1 6
6 i6 ¼ j 7 i6 ¼j
qffiffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffi 7 . To maximize πs , the type tj matching with the maximal value of qffiffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffi should be selected.
4v 4 1
5 1
dj þ ρ λ d
i6¼j ij i
dj þ ρ λ d
i6¼j ij i

2
Proof of Proposition 2. i) When λij ¼ 0 ð8i;j 2 NÞ, we have πs ðtk Þ ¼ ðv 4vcs Þ dk . To maximize πtk , the type tk with the corresponding maximal value of dj
should be selected. And according to Proposition 1, when λij ¼ 0, we have p*s ¼ vþc 2 . ii) When λij ¼ 1 ð8i; j 2 NÞ, we have π s ðtj Þ ¼
s

� P �2 P � P �� P ��
P i2N di ρv cs
d dj ð1 ρÞ
i2N i
di ρv
. We have ∂sdj j ¼ 14ρvρ P di2N d ð1 ρÞ cs
∂π ðt Þ P i2N di ρv þ cs 0. πs ðtj Þ is increasing in dj . Therefore, S*s ¼ ftk jk ¼
d dj ð1 ρÞ 4ρv d dj ð1 ρÞ 2
i2N i i2N i j i2N i
P
ρv di
argmaxfdj gg. According to Lemma 1, we have p*s ¼ 2½P d i2Nd ð1 ρÞ� þ c2s .□
i2N i k

Proof of Lemma 3. The firm’s profit function is

h� pm �X � pm � X X i
π m ðpm Þ ¼ ðpm cm Þ 1 dj þ 1 λjk dj :
v j2K ρv k2K j2K
P P P P P P
2 2 d 2 λ d dj þ λjk dj
j2K j k2K jk j
We have ∂ πm ðpm Þ
∂p2m
¼ v
j2K
ρv < 0. Therefore, π m ðpm Þ is concave in p, and we can obtain p*m ¼ c2m þ 2v P j2Kd þ1Pj2K Pk2K λ d from the first
j2K j ρ j2K k2K jk j

order condition.
Proof of Proposition 3. i) We prove part (i) by contradiction. Suppose Sm ¼ ftj j8j 2 K; jKj < rg is the optimal assortment if a system with a low mass
customization level is adopted. Assume S’m ¼ ftj j8j 2 K’ ; K ⊂K’ ; jK’ j ¼ rg is another assortment. Define ΔK ¼ fjj8j 2 K’ ; j 62 Kg ¼ fjj8j 2 K; j 62 K g. We
’

have
� �h� pm ��X X � � pm �� X X X �i
π m ðSm Þ π m S’m ¼ pm clm 1 dj dj þ 1 λjk dj dj
v j2K
ρv
j2K ’ j2K k2K j2K
’

�h � pm � X � pm �� X X X�X ��i
¼ pm clm 1 dj þ 1 λjk dj þ λjk dj dj
v j2△K ρv j2△K k2K ’ k2K
j2K
�h � p �X � p �X � p � X�X �i
m m m
< pm clm 1 dj þ 1 dj þ 1 λjk dj dj
v j2△K ρv j2△K ρv ’ k2K
j2K
�h�p pm � X � pm � X � X �i
l m
¼ pm c m dj þ 1 λjk dj dj < 0
v ρv j2△K ρv ’ k2K
j2K

Therefore, Sm ¼ ftj j8j 2 K; jKj < rg cannot be optimal and an optimal assortment should include r product types. We then prove that S*m ¼
ftj j8j 2 K1 g is the optimal assortment by contradiction. Suppose S’m ¼ ftj j8j 2 K’ ; jK’ j ¼ r; K’ 6¼ K1 g is another optimal assortment. Define ΔK1 ¼
fjj8j 2 K1 ; j 62 K’ g ¼ fjj8j 2 K ; j 62 K1 g and ΔK’ ¼ fjj8j 2 K’ ; j 62 K1 g ¼ fjj8j 2 K1 ; j 62 K g.We have
’ ’

� � �h� p*m �� X X � � p*m �� X X �i ��p*m p*m �� X X �

π m S*m πm S’m ¼ p*m clm 1 dj dj þ 1 dj dj ¼ p*m clm dj dj > 0:
v j2ΔK1 j2ΔK ’
ρv j2ΔK’ j2ΔK1
ρv v j2ΔK1 j2ΔK ’
P
clm d
j2N j
Therefore, S’m cannot be optimal. According to Lemma 3, we have p*m ¼ 2
þ 2v P P
dj þ1ρ d
.
j2K1 j2K1 j

9
X.-F. Shao International Journal of Production Economics xxx (xxxx) xxx

ii) Suppose S’m ¼ ftj j8j 2 K; r � jKj < ng is another optimal assortment if a system with a high mass customization level is adopted. We have πm ðS*m Þ
h� �� P P � � � i �* �
*
p* P p*m P
πm ðS’m Þ ¼ ðp*m chm Þ 1 pvm dj dj 1 ρmv
p
dj ¼ ðp*m chm Þ ρmv v dj > 0.
j2N j2K j2K j2K

chm þv
Therefore, S’m cannot be optimal. According to Lemma 3, we have p*m ¼ 2 .
0 1
P
d
j2N j chm clm
vB C
Proof of Proposition 4. i) According to Proposition 3, we have ph*
m pl*
m ¼ 2 @1
P
dj þ1ρ
P
dj
Aþ 2 > 0:
j2k1 j2K1

0 1
P
B dk þ λik di C chm cs
According to Lemma 1 and Proposition 3, we have ph*
m p*s ¼ 2v @1 dk þ ρ 1
Pi6 ¼k
Aþ
λ d 2 > 0. ii) According to Lemma 1 and Proposition 3, we
i6¼k ik i

0 1 0 1
P P P P
clm cs d þ λ d d
j2N j B dk þ λik di d
j2N j
v B k Pi6¼k ik i C C
have ​ pl*
m p*s ¼ 2 @
2 d þ1 λ d
P
dþ 1
P
d
A. Therefore, pl* * l
m > ps if cm cs > v@d þ1Pi6¼k λ d P
dþ 1
P
d
A.
k ρ i6¼k ik i j2K1 j ρ j2K1 j k ρ i6¼k ik i j2K1 j ρ j2K1 j
0 1
P � P �
B cs dk þ λ d i C cs d þ λ d P
1 ik
1 k Pi6¼k ik i
Proof of Proposition 5. The sales quantity in the standardization strategy is Qs ¼ @1 2v 2 dk þ λ d 1
Pi6¼k Adk þ 1 2ρv 2 dk ρ þ λ d
λik di ¼
1
P � cs P � i6¼k ik i i6¼k ik i i6¼k
d d d d . Therefore, we have
ρ
2 k þ λ ik i 2ρv k ρ þ λ ik i
i6¼k i6¼k
P P
ðv cs Þdk ðv chm Þ j2N dj λ d � � P
Qs Qhm ¼ 2v þ i6¼k ik i
2 1 ρcvs . Because 1 ρcvs > 0, we have Qs > Qhm ​ when ​ ðv cs Þdk � ðv chm Þ dj . ii) If a system with a low
j2N
0 1
P P ! P
d dj d � P
clm j2N j CP clm P j2N j clm
Qlm
B 1 1 P
mass customization level is adopted, we have ¼ @1 2v 2
P
dþ 1
P
d
A dj þ 1 2ρv 2 ρ
j2NP
dj þ j2K dj
dj ¼ 2 2ρv ρ dj þ
j2K1 j ρ j2K1 j j2K1 j2K 1 1 j2K2 j2K1
� �
P P P P P
chm d clm dj þ1ρ dj
P � j2N j j2K1 j2K1
chm d þ1
j2K1 j ρ
d
j2K1 j
dj . We have Qlm Qhm ¼ 2v . Therefore, if clm
� P
d
, we have Qlm � Qhm .
j2N j 2 32
j2K1
P P
dk þ1ρ λ d
i6¼k ik i 6
dk þ λ d
Proof of
Proposition 6. According to Lemma 1 and Proposition 3, we can get πs ¼ 4v d Pi6¼k ik i 7
cs 5 ; πlm ¼
4v k þρ
1
λ d
2 32 i6¼k ik i
P 1
P P 2P
d j þ dj d j ðv chm Þ d
j2K1 6 l 7 h j2N j
j2K1 j2NP
c and . Therefore, we have
ρ
4v P m 5 π m ¼
4v dþ 1
d 4v
j2K1 j ρ j2K1 j

0 1 0 1
P sffiffiffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi P P
B dk þ i6¼k λik di C dk þ1ρ λ d B dj dk þ λik di C
π hm < πs if chm > vB P i6¼k ik i ; πlm < π s if clm > vBP
@1 A þ cs
j2NP
sffiffiffiffiffiffiffiffiffiffiffiffiffi� ffiffiffiC
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi� ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffii6ffi¼ffiffik��
sffi� ffiffiffiC
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi� Aþ
j2N
dj @ j2K
dj þ1ρ d
j2K1 j
P 1
P 1 P 1
P 1
P
d
j2N j
dk þρ λ d
i6¼k ik i
dþ
j2K1 j ρ
d
j2K1 j
dk þ ρ λ d
i6¼k ik i

0 1
sffiffiffiffiffiffiffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi sffiffiffiffiffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi sP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffi P
2
d þ1ρ λ d B dj C j2K1 j ρ
d þ1 j2K dj ðv clm Þ d
Pk i6¼k ik i j2N j
cs d þ1 j2K dj
P ; and πhm � π lm if chm � vB
@1
P
dj þ1ρ
j2NP
dj A
C þ c l
m
P
d
1
. When ¼ 1; ​ we ​ have π lm ¼ 4v > πhm ¼
j2K1 j ρ 1 j2K1 1 j2K j2N j

P P sffiffiffiffiffiffiP
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2
ðv chm Þ d
j2N j
ðv cs Þ2 ðdk þ λ dÞ
i6¼k ik i
dk þ λik di
4v . According to Lemma 1, when ρ ¼ 1, πs ¼ 4v . Therefore, πs > πlm if clm >v ðv cs Þ P i6¼k
d
.
j2N j
pffi
cl cs αγ chm pcsffiγ
Proof of Proposition 7. According to Proposition 6i), SD is superior to LMC if v < m αγ and SD is superior to HMC if v <
pffiffi pffiffi . Therefore, SD is the
1 β
γ
8 9 α β
>
> >
<cl c pαffi ch pcsffiffi>
= cm h clm
ffi cl
chm pmffi
optimal strategy if v < min m pαffiffiγ γ ; pγffiγ . According to Proposition 6ii), HMC is superior to LMC if v � 1 pffiααffi and LMC is superior to HMC if v < 1 pffiααffi .
s m
p

> α β 1 β >
>
: >
;
8 9 8 9 8 9
>
> >* > > > >+
<cl c pαffi ch pcsffi> = ch pclmffi <cl c pαffi ch pcsffiffi>
> = h pclm
cm αffi
>
< p ffi
cm cs γ cm pγffi
l α h c s
>
= ch pclmffi
Therefore, when min m pffiαffiγ γ ; pffiffiγγ pffiαffi , LMC is the optimal strategy if min v When min pffiαffi , LMC will
s m m m s m m
pffiffi ; pffiffi ffiffi pffiffi ; pffiffi
γ γ
� < p :
1 β > 1 1 β > 1 1 β > 1
α αγ γ α αγ γ α
>
> α β > >
> α β > >
> α β >
: ; : ; : ;
8 9
>
> >
<cl c pffiα ch pcsffiffi> =
never be optimal and HMC is the optimal one if v � min m s m
p ffi
αγ ;
ffi γ
p ffiγ

1 β >
γ
>
> α β >
: ;

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