Living Economics

Niche Competition
Mass customization using e-commerce and digital production technology has brought uniquely different products to suit individual tastes and a new component (niche competition) to the conventional textbook market structure.

People living in small towns used to travel to big cities to shop for things that were not carried in their local stores. But increasingly, they find that the malls in big cities have the same chain stores that they could find locally. And in these big chain stores, most of the items carried are best sellers with very little variety. For example, Wal-Mart, the nation's biggest grocer carries 20,000 fewer items than most supermarkets. The same emphasis on fast-moving mid-market items means that even Best Buy, the nation's top consumer electronics retail chain, does not carry most upscale digital cameras and video camcorders.

In such a mass-market world, it is easy to see why producers are risk-averse and concentrate their efforts in coming up with blockbusters. Book publishers, movie and music producers all try to use intensive marketing to generate a handful of hits.

Other things being equal, such limited selection of goods would tend to produce a bland culture with homogeneous preferences. Fortunately, e-commerce and digital production technology have saved the day. The Internet has been very effective in aggregating scattered demand into a viable critical mass to sustain niche products. Niche products no longer have to fight for limited shelf space in the physical stores. Instead, they could be cheaply stored in far-away warehouses. In fact, they don't even have to be produced in advance of consumer orders. Digital technology can customize production to meet individual demands. For example, on-demand publishing makes it possible to print and bind one copy of an obscure book from the digital file for one customer. There is no need to store any physical inventory of printed books. Clothing can be custom made to digitally-scanned body measurements to form fit individual bodies.

Niche marketing not only expands the market but also promises higher profit margin by charging close to the buyers' reservation price1. As mass production tends to commoditize goods and reduce profit margin, so mass customization tends to differentiate goods and raise profit margin. In the extreme, when each item is individually customized, an entirely different market structure emerges where products are neither homogeneous nor "differentiated", but uniquely different. Before the Internet age, prices for unique items except those from widely known producers were highly subject to local demand. With the power of the Internet to cheaply aggregate buyers and sellers, prices can be stabilized to the benefit of both buyers and sellers.

Niche products will be more expensive but not as expensive as hand-made products using expensive labor. A brave new world emerges where big and small businesses can co-exist offering customized products. The market structure is neither oligopolistic competition because business does not have to big to offer unique products nor monopolistic competition because variety is compatible with efficient scale of operation. Perhaps it may be called niche competition.

Note:
  1. The highest price a buyer is willing to pay rather than doing without.
  2. The highest price a buyer is willing to pay rather than doing without.
References:
  • Business Week. 7/19/2004. "There goes the rainbow nut crunch."
  • Business Week. 12/02/2002. "A mass market of one."
  • Economist. 12/2/2002. "Profiting from obscurity."
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