Background to the research

The power of the Internet lies in its ubiquitous presence and ability to provide low cost and universally standard means for content exchange, coordination and collaboration (Barua et al., 1999). The Internet economy is an example of the new economy. In this thesis I follow the explanation of Arthur (1996) who describes the new economy as an economy of increasing returns opposed to the economy of diminishing returns, seen from the information supplier perspective. The difference between the ‘old’ economy and the ‘new’ Internet economy can be found in two areas. The first is the networked economy with phenomena like positive feedback and network externalities (Arthur, 1996; Katz and Shapiro, 1985), the second can be found in the characteristics of digital products, which are fundamentally different from traditional tangible products. This section outlines the broad field of study and then leads into the focus of the research problem. The thesis is based on three main themes which are interrelated: digital products, mass customization and variety.

The first main theme is digital products. Digital products have some characteristics that distinguish them from physical products (Choi et al., 1997; Shapiro and Varian, 1999; Evans and Wurster, 2000). Physical products take physical space, and it takes time to physically transport them. Digital products do not take physical space, and they can be transported over networks such as the Internet, which reduces transportation time to almost zero. Other differences can be found in the physical characteristics of digital products. These characteristics are indestructibility, transmutability and reproducibility (Choi et al., 1997; Werbach, 2000). Indestructibility means that the number of uses does not reduce the quality of the product in any way. Transmutability means that digital products are easily perceptible to change, which allows for customized and personalized products to be delivered. Reproducibility refers to the ease with which copies of digital products may be produced at low and constant costs. This last characteristic has major implications for the cost structures of digital products (Shapiro and Varian, 1999; Evans and Wurster, 2000). Digital products are costly to produce but cheap to reproduce, which means that the cost of production is dominated by the first-copy costs. This is also different from physical products, which have to be priced according to the production costs.

The second main theme is customization. Needs and desires of consumers are changing, which leads to high market turbulence (Pine, 1993). Mass customization is a term which is often used in literature, basically referred to as mass production of customized goods. Many researchers addressed mass customization for physical goods (Pine, 1993; Gilmore and Pine, 1997; Lampel and Mintzberg, 1996; Duray et al, 2000; Tseng and Piller, 2003; MacCarthy et al., 2003). Because digital products are transmutable, they are extremely customizable. The Internet economy enables strategies of customization and personalization for suppliers of digital products, much more than the economy of tangible products. These enablers are the characteristics of digital products. Take for example the Amazon.com website. Jeff Bezos of Amazon: “If I have 10 million visitors to my Web site, I should have 10 million Web sites for my visitors!” (Riedl, 2001). Santonen (2003) suggests basically the same, but instead bases it on demand-side economies of scale (Shapiro and Varian, 1999). Demand turbulence is increasing the level of customization in the case of digital information products (Santonen, 2003).

The third main theme is variety. Variety, or increased choice, is positively related to consumer surplus (Brynjolfsson et al., 2003). Variety is a term that sometimes is mixed up with customization. Customization and variety are strongly related to each other, but variety is not the same as customization. Variety provides choice for consumers, but not the ability to specify the product as is the case with customization. Variety is the tool for mass customization, because it can create the link between the consumer and the product (Svensson and Jensen, 2001). Customization can lead to many variations of products. In addition, the reproducibility of digital products can lead to an enormous variety. The Internet makes it possible to reproduce digital products for virtually anyone, which can lead to an enormous choice of digital products.

The three themes described have some relations. First, the characteristics of digital products enable the customization of these products, and second, in combination with the Internet, the characteristics make it possible for consumers to have virtually unlimited choice. These relations uncover a gap in literature. The majority of research addressed the mass customization of physical products, however almost no research addresses the customization of digital products. The following section elaborates on this gap in more detail.

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