Hypotheses

This paragraph presents the hypotheses of this thesis. If these hypotheses can be supported with the empirical research, they can be used to answer the overall research question.

Overall research question: How to support customization and personalization for pure digital products in the Internet economy to dramatically decrease complexity and search costs for consumers, so variety can be maximized?

The literature review revealed that digital products are very well suited to be customized (Choi et al., 1997; Shapiro and Varian, 1999). The literature review also showed that digital products as well as consumer demand leads to more variety when compared to physical products (Choi et al., 1997; Shapiro and Varian, 1999; Evans and Wurster, 2000). The Internet makes versioning, personalization and bundling even easier. Various digital products can be personalized by versioning and bundling, and can be delivered on demand by direct interaction of the consumer with the supplier. Digital products allows for some interesting twist on bundling, which is called customized bundling (Shapiro and Varian, 1999). This bundling can be compared with modularization to some extent. Different products, or modules, can be bundled together while interacting with the supplier. Because consumer preferences differ, an increase in variety would make more variations in bundling possible.

Variety is a tool for customization, because it can create a link between the consumer and the product (Svensson and Jensen, 2001). Also, demand turbulence is increasing the level of customization in the case of digital information products (Santonen, 2003). Because of these arguments, I assume that that an increase in product variety would make more combinations of bundles possible, which leads to the following hypothesis:

H1: The larger the product variety, the higher the level of customization.

Thus, more variety should make it easier for the supplier to enable the consumer to customize digital products. Following the definition of customization for this research, it means that an increase in variety should increase supplier-consumer interaction at the design stage of the operations level to create customized digital products delivered over the Internet.

As the arguments above lead to H1, these arguments also mention that an increase in customized versions leads to more personalized products. As more customized or personalized digital products are created by the consumers, it is possible to make more different bundles which can in turn increase variety. Consumers generally prefer more variety when given a choice (Kahn and Lehmann, 1991), and they tend to use the supplier with the largest variety (Loebbecke, 1999) Permutations of choice options quickly reach an immense number of possible products (Franke and Piller, 2003; Choi et al., 1997). If digital products have standardized interfaces, which are loosely coupled and have a clear relationship, they can form a modular system (Wolters, 2002). As the type of modularity employed is a characteristic of the customization classification, it can lead to more variety. This leads to the following hypothesis:

H2: The higher the level of customization, the larger the possible variety.

The two hypotheses above are mutually reinforcing. If the above hypotheses can be proven valid, pure customization will be reached when variety can be maximized. When the possible variety is high, it is possible for more consumers to find what they are looking for, which is positively associated with consumer surplus (Brynjolfsson, 2003; Hoch et al., 1999; Baumol and Ide, 1956; Desmeules, 2002). However, an increase in variety does not necessarily mean an achievement of more consumer surplus. It is the goal of this research to make an addition to existing theory about consumer surplus in the Internet economy, and in particular the contribution of customization of digital products.

The literature on variety induced complexity unveiled the drawbacks of variety. Abundance in variety can result in doubt and regret avoidance mechanisms (Desmeules, 2002). In going to some particular store the consumer incurs some costs (Baumol and Ide, 1956; Helander and Khalid, 2000). The difficulty of shopping increases with the number of items that are offered. Prices change with varying frequency in all markets, and no one will know all the prices which various sellers quote at any given time (Stigler, 1961).

Abundance in variety can result in supply overload, and in combination with low transaction costs can lead to excessive volumes of information generating complexity (Schwartz, 2000; 2004; Desmeules, 2002, Piller et al., 2005, Huffman and Kahn, 1998). This abundance makes it harder for consumers to find or discover the right digital products, which increases search costs. Search costs are accepted by the consumer if they lead to savings greater than the search costs (Baumol and Ide, 1956; Stigler, 1961). These costs need not to be equal for all consumers because of differences in tastes and costs of time can differ (Stigler, 1961). Like transaction costs, search costs in the Internet economy are lower than they are in physical economies, but an excessive increase in variety in general, and an increase in complexity in particular makes it more difficult for consumers to find all relevant information or, as Shapiro and Varian (1998) put it, the best information. The drawbacks of variety from the perspective of the consumer can be summarized as complexity for the consumer, and also as extra costs for the consumer. The reasoning above leads to the following composite hypotheses:

H3.1: The larger the variety, the larger the complexity.
H3.2: The larger the complexity, the higher the search costs.

The above hypotheses show that digital products and the Internet economy lead to customization and variety, and also that variety in the form of complexity can lead to more costs for the consumer, while minimization of search costs positively influences consumer surplus (Choi et al., 1997; Shapiro and Varian, 1999). If the hypotheses H3.1 and H3.2 can be supported, increase in variety will lead to higher search costs. At the same time, the Internet economy has already led to lower search costs compared to the physical economy. This implies that the advantages of the Internet economy must outweigh the disadvantages of the increase in variety to obtain consumer surplus.

In most literature search costs are being defined as costs to get the best deal possible to obtain a specific product (Choi et al., 1997; Shapiro and Varian, 1999; Keeney, 1999). Information filtering becomes increasingly critical as consumers are faced with an overload of information (Choi et al., 1997; Blecker et al., 2006; Loebbecke, 1999). When variety is maximized, search costs also play a role in locating or discovering unknown products within a single supplier. Finding products where consumers are unaware of, improves consumer surplus, and also the perception of variety is important (Brynjolfsson, 2003; Blecker et al., 2006; Desmeules, 2002). Product awareness thus lowers search costs. Because in general, firms know more about their products than the consumers do (Choi et al., 1997; Wigand et al., 1997), making consumers aware of products can be part of the customization strategy of a digital content supplier.

Consumers experience difficulties during the product selection process because of the perceived complexity, but not necessarily because of the actual complexity or variety. Optimal consumer assistance during the interaction process considerably decreases the perceived complexity, while the actual variety can be very high and is therefore independent from the perceived variety (Huffman and Kahn, 1998). The literature review on variety and complexity uncovered some strategies or methods the supplier can use to reduce the variety induced complexity from the perspective of the consumer (Kurniawan et al., 2006; Piller et al., 2005; Dellaert and Stremersch, 2004; Blecker et al., 2006; Huffman and Kahn, 1998). For this research, these strategies or methods should be applied during the supplier-consumer interaction, or during customer involvement which is one method to classify a mass customizer (Duray et al., 2000). This leads to the final and probably most important hypothesis of this research:

H4: The higher the level of customization, the lower the search costs.

fig 2.7

From the above hypotheses and the research framework visualized in Figure 2.7, it can be concluded that variety influences search costs both positively and negatively, that is, if the hypotheses can be supported. Therefore the importance of customization becomes extremely important. To allow for variety to be maximized, it is important to arrange customization in such a way that it first will abolish the negative influence of variety induced complexity, and second, supports consumer surplus by making use of the maximum increase in variety. Consumer surplus due to increased product availability is seven to ten times larger compared to lower prices due to increased market efficiency (Brynjolfsson et al., 2003).

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2 Responses to Hypotheses

  1. Arun says:

    Which among the following is drawbook of consumer surplus (as explained in marginal utility analysis..)

    (1) it is highly hypothetical and imaginary
    (2)it ignors the interdependnce between the goods.
    (3)it cant measured in terms of money becouse marginal utility of money changes.
    (4) All of the above

  2. Arun says:

    Corporate savings depend upon?

    (a)profit level
    (b)income level
    (c)production level
    (d)loans level

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