Products' Differentiation

Policy

MONOPOLISTIC COMPETITION
A market structure characterized by many firms selling
differentiated products in an industry in which there is
free entry and exit.

Characteristics of monopolistic competition:

1. Product differentiation
2. Many firms
3. Free entry and exit in the long run
4. Independent decision making
5. Market Power
6. Buyers and Sellers have perfect information

EXAMPLES OF MONOPOLISTIC
COMPETITION
Banks

Sporting Goods

Radio Stations
Clothing

Fish and Seafood

Jewellery

Computers

Health Spas

Frozen Foods

Apparel Stores

Canned Goods

Convenience Stores

Product Differentiation - A Definition

Product (or service) differentiation is business level
strategy intended to:

Increase the perceived value of firms products(or

services) compared to competitors products (or
services)

Create a customer preference for firms

products/services

Characteristics Of Product Differentiation

Each firm produces a product that is slightly different
from those of other firms

Rather than being a price taker, each firm faces a

downward-sloping demand curve

Close substitutes but no perfect substitutes

An attempt to increase price will normally results in a
lower volume sold

Product differentiation
The differences in the product may be
of1.Product Quality
2.Services
3.Location
4.Advertisement and Packaging.

 Product Quality:
Product Differentiation can take place in the form of
physical or in the form of qualitative differences.
Differences in functional features, materials, design
Example : economics text books

Services:
Services associated with product
Example: home delivery

 Location:
Depending on the location or accessibility, products may
also be differentiated
Example: grocery stores and super markets, fuel stations on
highways.

Advertisement and Packaging:

Standard of advertisement, the use of brand names,
trademarks and the type of packaging have the power to
differentiate a product from other.
Examples: Ariel and Surf

A Base of Differentiation must fill

some customer need

Basis of Differentiation
Almost anything can be a basis of
differentiation:

The wide range of customer needs can be

filled by a wide range of basis of differentiation
Tangible thing (product features, location, etc.)
Intangible concept (reputation, a cause, an ideal,
etc.)
Limited only by managerial creativity.

Example: Fred Smith

FedEx

10

Horizontal Differentiation
Products vary in certain product characteristics to appeal
to distinct consumer groups.

Horizontal differentiation can be linked to differentiation in

colours (different colour version for the same good), in
styles (e.g. modern / antique), in tastes.

Eg. the ice-cream offered in different tastes. Chocolate is

not "better" than lemon.

The supplier of many versions decides a unique price for

all of them. Eg. Chocolate ice-creams cost as much as
lemon ones.
11

Vertical Differentiation
Vertically differentiated products differ in quality.
Here goods present can be ordered according to their
objective quality and be ranked from the highest to the
lowest. We can say here that one good is "better" than
another.

12

 When evaluating a real market, a good starting

point is a top-down grid of interpretation, we
shall present first in 3 segments.

Class

Price

Crucial feature

Low

The price is low, the

product simply works

Low
Middle
Middle

High
High

Use of the good is

comfortable.
Most
people use it. Mass
market brand
Quality,
exclusivity, durability
(= low life-long price)

 To this basic classification, one should add two

intermediate classes:
Class

Price

Crucial feature

Low

The cheapest nationwide brand

Middle

The cheapest product

of high quality

Middle-low
Middle-high

Two extreme classes should finally be added:

Class

Price

Extremely low
Very Low

Extremely High
Very high

Crucial feature

It usually does not

work, it does not last,
and it has important
defects
Exclusivity,
non
practical, status symbol

Mixed Differentiation
Complex markets are characterized both by horizontal and
vertical differentiation.
Eg, apparel, garments and shoes have a rich
combination
of
shapes,
colours,
materials,
complementarities, style etc. Here, the quality of the
materials can often be seen as a vertical differentiation but
shape would be horizontal.

Basis of Differentiation
1) Product Attributes
exploiting the actual product
2) Firm-Customer Relationships
exploiting relationships with customers
3) Firm Linkages
exploiting relationships within the firm
and/or relationships with other firms

Basis of Differentiation
Product Attributes
1)Product Features

The shape of the product (VAIO)

2)Product Complexity

Multiple features on a cell-phone (Smartphone's)

3)Timing of Introduction

Being first to market (Sony Walkman ,I-Pod)

4)Location

Locating next to a freeway exit (Motorway exit)

Basis of Differentiation
Firm-Customer Relationships
1)Customization

Creating a unique product for a customer

(DELL,BMW)
2)Consumer Marketing

Creating brand loyalty

3)Reputation

Creating reputation for brand

Basis of Differentiation
Firm Linkages
1)Linkages among functions in the firm
Using circuit board designed in one division in another
division
2)Linkages With Other Firms
A sporting goods store sponsors a benefit race by
donating running shoes and receives free radio
advertising in return
3)Product Mix
Offering extended product mix to attract customers
4)Distribution Channels
Selling own products/service via different distribution
channels
5)Co branding
Starbucks inside a Barnes and Noble store

COMPETITIVE ADVANTAGE
A product differentiation strategy must meet the
VRIO criteria
Is it Valuable?
Is it Rare?
Is it costly to Imitate?
Is the firm Organized to exploit it?
if it is to create competitive advantage.

New technology
and innovation
Durability
Quality

Middle class
car
Versatile
Economic

High pricing
Status & styling
Intelligent
engineering

DEMAND CURVE FOR A

MONOPOLISTIC COMPETITIVE
FIRM
Price and
marginal
revenue

Marginal

Demand
and price

revenue

OUTPUT

Thank You! ^^
In case if the internet is connected:
http://www.investopedia.com/terms/p/product_differentiation.asp