Customization of the Internet Economy - Dissertation

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Customization in the Internet economy

Masters research by Dutch student Bas Reus, which can be monitored through his 'Bottom Up' blog.



In this thesis I deal with the question how to support customization and personalization for pure digital products in the Internet economy to dramatically decrease search costs for consumers, so variety can be maximized. This thesis builds upon theories about digital products, mass customization and variety. These three themes have some relations that uncover a gap in literature. In this thesis I developed hypotheses based on these relations, and tested them empirically. The hypotheses are: larger variety enables higher levels of customization, higher levels of customization leads to larger possible variety, larger variety leads to more complexity and more complexity leads to higher search costs for consumers, and higher levels of customization leads to lower search costs for consumers.

The main motivations for this thesis are the specific characteristics of digital products and the Internet economy. The characteristics of digital products enable the customization of digital products, and in combination with the Internet, these characteristics make it possible to for consumers to have virtually unlimited choice. This thesis uncovers a gap in literature. Where the majority of research on mass customization addresses the customization of physical products, this thesis addresses the customization of digital products on the Internet.

To accomplish the goal of this research, I conducted a case study at two companies that supply digital products on the Internet in the form of music. These companies, and Pandora Media, allow consumers to customize and personalize radio stations. The main data sources of the case study are three interviews, which are analyzed by applying the technique of pattern matching.

The results show that some hypotheses are supported by the empirical data, and some are not. The case studies show that companies should follow a mass customization strategy where consumers are involved early in the design and fabrication process, and employ modularity at the assembly and use stages. These companies can be classified as involvers (Duray et al., 2000). The main differences between the proposed hypotheses and the empirical data can be found in complexity and search costs. The case studies show that variety does not necessarily leads to more complexity and higher search costs, because it is not the intention of the supplier to lower the average interaction length of time and in turn to lower search costs for consumers, but to increase interaction to allow the consumer to discover new digital products.

The conclusions lead to the revision of the proposed hypotheses, and have implications for theory on digital products and mass customization. Digital products are experience goods, which leads to two important implications. First, instead of lowering the average interaction length of time (Blecker et al., 2006), it is desired to increase the average interaction length of time between the supplier and the consumer. Second, instead of lowering search costs for consumers, it is desired for them to discover as much as new products as possible. This thesis contributed to the existing knowledge of mass customization by determining the strategy to choose when offering customizable digital products, which should be the involver. This thesis contributed to the work of Brynjolfsson et al. (2003), who question whether it is lowering search costs that improves consumer surplus, or discovering obscure products. Where literature suggests that lowering search costs increases consumer surplus, this thesis shows that discovering new digital products outweighs minimization of search costs.

Keywords: digital products, mass customization, product variety, consumer surplus, complexity, search costs, interaction systems, Internet economy.