Quaderni del Dipartimento di Scienze Economiche e Matematico-Statistiche dell'Università del Salento - Collana di Economia

In this paper we present a model of spatial competition that highlights firms� customization strategies in an imperfect competitive environment. The nature of competition in markets with products designed according to consumer preferences is discussed both in a framework of exogenous and endogenous set-up costs. Set-up costs are considered endogenous when technology is such that reductions in variable customization costs are feasible at
additional set-up costs. It is shown that when set-up costs are exogenous, strategic interaction induces firms to choose the most e efficient customization technology, though the latter entails a reduction in prices and profits and a more concentrated market structure. When set-up costs are endogenous, the incentive to choose strategically a more e efficient customization technology depends on the possibility to cheaply transfer the customization costs into the set-up costs. This explains why customization is more frequently observed for information goods and in digital markets.