A simulation study of prototyping for risk reduction in product customization

This paper develops a risk model that captures the inherent uncertainties concerning the value and cost of a customized product. Analysis based on the model reveals that risks may handicap potential transactions and consequently prevent customers and manufactures from tapping into the value of customization. Prototyping, as commonly used in product customization, is then interpreted as a means of risk reduction and modeled via a Bayesian estimation process. Numerical analysis based on simulation is conducted to investigate the investment decision upon prototyping with respect to the fidelity and cost of the prototype. This paper provides a decision framework for practitioners to understand and manage transaction risks in product customization.