Collaborative Prototyping and the Pricing of Custom-Designed Products

A major challenge in the creation of custom-designed products lies in the elicitation of customer needs. As customers are frequently unable to accurately articulate their needs, designers typically create one or several prototypes, which they then present to the customer. This process, which we call collaborative prototyping, allows both parties to anticipate the outcome of the design process. Prototypes have two advantages: They help the customer to evaluate the unknown customized product, and they guide both parties in the search for the ideal product specification. Collaborative prototyping involves two economic agents, with different information structures and different---and potentially conflicting---objective functions. This raises several interesting questions: how many prototypes should be built, who should pay for them, and how should they and the customized product be priced. We show that, depending on the design problem and the market characteristics, the designer should offer prototypes at a profit, at cost, or even for free.