Optimal Pricing, Modularity, and Return Policy Under Mass Customization

Abstract

Mass customization (MC) is a pertinent industrial practice. Different from the non-MC products, consumer return for MC products is typically prohibited. MC retailers can thus gain significant competitive advantages by offering a consumer return policy. By constructing an analytical model with both demand and return uncertainties, we study in this paper the optimal policy with three dimensional decisions on pricing, consumer return, and level of modularity under a mean-variance formulation. Structural properties of the model are revealed, and the closed-form solutions for the optimal decisions are derived. An extensive sensitivity analysis is subsequently conducted to explore how the risk sensitivity, demand uncertainty, return uncertainty, and other important parameters affect the optimal decisions and profits. A few counterintuitive findings are obtained, and important insights are generated.