Essays on service and product flexibility

This dissertation consists of three independent essays. The first essay, Competitive Customization, considers a duopoly market with heterogenous customer tastes. We characterize each firm's investment in mass customization and study how it depends on its competitive position, determined by its cost efficiency and perceived quality vis-a-vis its competitor. We find that the value of mass customization critically depends on the firm's competitive position: It may not be desirable even at zero cost due to its negative effect on price competition. We show that allowing firms to set different prices for each product configuration leads to a broader adoption of mass customization compared to when they are restricted to uniform prices. However, a firm's chosen customization level may be higher with uniform prices. The second essay, Product-Line Competition, studies the duopoly competition between a traditional firm that sells a chosen set of standard products and a firm that sells mass-customized products, incorporating the effects of fulfillment and delay costs. Unlike the traditional firm, the customizing firm does not carry inventory, but its customers incur waiting costs until they receive their orders. We identify market conditions that favor customization under competition. We find that the customizing firm's profit is not monotone in the market size and ease of customization. We show that the traditional firm competes by achieving an efficient scale for each product variant, which optimally balances its fulfillment costs against the costs of customer misfit. Furthermore, its efficient scale is the same in a monopoly (both single- and dual-channel) and a duopoly. The third essay, Self-Interested Routing in Queueing Networks, studies self-interested routing in stochastic networks, taking into account the discrete stochastic dynamics of such networks. We analyze a two station multiclass queueing network in which the system manager chooses the scheduling rule and individual customers choose routes in a self-interested manner. We show that this network can be unstable in Nash equilibrium under some scheduling rules. We also design a non-trivial scheduling rule that negates the performance degradation due to self-interested routing and achieves a Nash equilibrium with performance comparable to the first-best solution.