Consumer self-design and brand competition

We examine competing brands' incentive to offer a self-designable package that consumers can modify to ensure fit, in addition to offering a standard, pre-configured product. While “amateurs” with low self-design capability prefer a standard, pre-configured product and can have strong preference for a particular brand, “experts” with high self-design capability prefer a self-designable package and tend to be indifferent between competing brands. First, we find that asymmetric equilibrium can arise where only one brand offers a self-designable package and the other brand offers a standard product only. That is, brands can avoid the lose–lose situation, where both offer the self-designable package but intensified price competition makes both lose profit. This lose–lose situation can be completely avoided when the two brands offer self-designable packages that are completely nondifferentiated, but may arise in equilibrium and cause the “prisoner's dilemma” when the packages are slightly differentiated. Second, we show that between two competing brands whose standard products have different attractions, the less powerful brand that offers the less attractive standard product is more likely to be the only provider of the self-designable package. Finally, we find that consumer surplus can be greater when the more powerful brand is the only provider of the self-designable package than when the less powerful brand is the only provider.