Other articles where product differentiation is discussed. The model yields intuitive predictions on the effects of the degree of product differentiation on the volume of trade and on the composition of the gains from trade under imperfect competition. Product differentiation as the basis for establishing a downwardfalling demand curve was first introduced in economic theory by sraffa. The structure of a market is also affected by the extent to which those who buy from it prefer some products to others.
In neoclassical theory, product differentiation provides consumers with a variety of different products within a particular industry, rather than a homogeneous product that characterizes purely competitive markets. At the high end, the product has a longer life or durability. Section 6 indicates how product differentiation is used elsewhere in economics. Product differentiation is a marketing process in which a product is differentiated from others. Bundling strategy and product differentiation 209 a model with heterogeneous consumers and elastic demand, allowing consumers to buy from more than one supplier. Goods are different but at the same price some consumers will buy one and some will buy other, it. It is at the heart of structural empiricism and it smoothes jagged behavior that cause paradoxical outcomes in several theoretical models. Although product differentiation is not required for an oligopoly to form, if a firm can successfully differentiate its products it will gain market power and resist competition more easily. Section 4 describes how the market variety diverges from the equilibrium one. Product differentiation and mergers in the carbonated soft.
On the other hand, if the price is relatively low, the quantity demanded will be high i. Scale economies, product differentiation, and the pattern of trade by paul krugman for some time now there has been con siderable skepticism about the ability of comparative cost theory to explain the ac tual pattern of international trade. Product differentiation and duration of us import trade. Product differentiation and duration of us import trade tibor besedes a. Discrete choice theory of product differentiation the. During the past decades, product differentiation has become a well developed field of industrial economics. He considered it more important to have a global understanding of the gross behavior of all solutions of the system than the local behavior of particular, analytically precise solutions. Since selling greater quantities requires a lowering of the price. This means making the product different from its competitors. Product differentiation being the most commonly used one of these two strategic typologies spencer, joiner, and salmon, 2009. Introduction in a differentiated product oligopoly, a.
The welfareenhancing benefit of product differentiation is the greater variety of products available to consumers, which comes at the cost of a higher average total cost of production. A unique selling point sometimes called a unique sales proposition is a. Relaxing price competition through product differentiation avner shaked. Product differentiation is the process used to distinguish one companys goods and services. Cambridge core industrial economics the economic theory of product differentiation by john beath skip to main content accessibility help we use cookies to distinguish you from other users and to provide you with a better experience on our websites. Levels of product differentiation economics web institute. Levels of product differentiation in the global mobile phones market the sixth product level called compliant product is a connecting element between the physical product characteristics and the strategy of the producer company stanimir andonov the article discusses the differentiation among the product offers of companies working in the. The formation and classification of differentiation, the basic techniques of differentiations, list of derivatives and the basic applications of differentiation, which include motion, economic and chemistry. This is done by firms to raise their market share of a product. Product differentiation is a process used by businesses to distinguish a product or service from other similar ones available in the market.
Relaxing price competition through product differentiation. Product differentiation definition, types, importance. A differentiation strategy involves the firm creating a product service, which is considered unique in some aspect that the customer values because the customers needs are satisfied. Differentiation is optimal product choice behavior because the resulting competition among. It was the subject of a book entitled differentiate.
This involves differentiating it from competitors products as well as a firms own product offerings. The economics of product variety consists essentially in analysing the effect of this balance in different situations, and com paring the degree of product variety for different market structures with each other and the optimum. Successful product differentiation creates a competitive advantage for the products seller. A companys offer has to be distinct from those of its competitors and should fulfill the requirements of the customers of its target markets. Product differentiation and mergers in the carbonated soft drink industry.
It identifies the qualities that set one product apart from other similar products and uses those differences to drive consumer choice. Scale economies, product differentiation, and the pattern. Product differentiation, competition, and international trade. Bundling strategy and product differentiation 211 fig. Differential equations in economics 5 analytic methods to discuss the global properties of solutions of these systems. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Differentiation and its applications project topics. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. If you hit the economics books, there are a few key terms that relate to the type of differentiation. The variable qi j is the amount of product j produced by.
Product differentiation and economic progress mises institute. A strategic perspective on product differentiation richard makadok. Estimating discretechoice models of product differentiation. Product differentiation is the main tool for risk selection in the isapres market. Monopolistic competition and product differentiation. In these models, product decisions are suppressed and product selection is determined by entry. Differentiating implicit functions in economics youtube. In some industries the products are regarded as identical by their buyersas, for example, basic farm crops. A situation in which products are sold in the same market but are made slightly different to others in order. Product differentiation and economic progress mises. It involves defining the offerings unique position in the market by explaining the unique benefit it provides to the target group. International product differentiation through a country brand.
This important study shows that an understanding of product differentiation is crucial to understanding how modern market economies function and that differentiated markets can be analyzed using discrete choice models of consumer behavior. This may be due to differences in design and construction or in the materials used. Implicit differentiation method 1 step by step using the chain rule since implicit functions are given in terms of, deriving with respect to involves. Oct 12, 2019 product differentiation or just differentiation is a marketing process of differentiating an offering product or service from others in the market, to make it more appealing to the target audience. Scale economies, product differentiation, and the pattern of. On the other hand, if the price is relatively low, the. Yet it was chamberlin who elaborated the implication of product differentiation for the pricing and output decisions as well as for the selling strategy of the firm. A differentiation strategy involves the firm creating a. In marketing, product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market.
Product differentiation an overview sciencedirect topics. Analysis on product differentiation strategy and product. Product differentiation is intended to prod the consumer into choosing one brand over another in a crowded field of competitors. China, 150030 2 college of tourism and cuisine, harbin university of commerce harbin, p. Product differentiation refers to variations within a. Up to now we have assumed that goods, produced by different firms, are homogenous, that is perfect substitutes. The goal of this tactic is to help businesses develop a competitive advantage and define compelling unique selling propositions usps which set their product apart from competitors. Hence, di erentiation is related to other aspects of rms strategies. Perceived differences between the product of one firm and that of its rivals so that some customers value it more. Product differentiation and price discrimination are two strategies used in marketing and economics. The project is written simply to illustrate on differentiations and their applications.
In the year 2000, i put the word differentiation in play, just as 20 years earlier id put the word positioning into the business language. If a product line is differentiated according to type of features, that is horizontal differentiation, because each product serves a different purpose. Before we deal with product differentiation, as is always mandatory in economics, we have to define what we mean by differentiation, and here there are 2 key. Companies do this because they want to show customers their product s attributes and uniqueness. If a product line is differentiated by the number of features, that is vertical differentiation, as the presence of greater functionality implies that some products are superior to others. If a firm sets a relatively high price for its products, the quantity demanded of the product will be low. Article pdf available in journal of industrial economics 342. Analysis on product differentiation strategy and product innovation of travel agency in china zhao yang 1,2 1 college of economics and management, northeast agricultural university harbin, p. A companys offer has to be distinct from those of its competitors and should fulfill the requirements of. If x denotes the total output of the industry, fx is the market price per unit of output and xfx is the total revenue earned from the sale of the x units. Firms in monopolistic competition have market power they have control over the price of their products.
Find the level of production that results in maximum revenue. Consider a twostage game to endogenize the choice of location, i. Now we will relax this assumption and allow firms to produce differentiated goods. Examples of the implicit function are cobbdouglas production function, and utility function. All goods will be produced with the same cost function. An important part of the marketing of the product is through product differentiation. The economic theory of product differentiation by john beath. A key term to remember is usp, which is the acronym for unique selling point. For decades, the economics discipline has studied how an industrys structure affects. Product differentiation is a positioning strategy that many firms use to distinguish their products from those of competitors. This video will help those who want to learn the use of differentiation in economics business economics quantitative economics managerial economics econometric and. This involves differentiating it from competitors products as well as a firms own products.
Ges services are tiedin with complementary benefits, which can lead to extensive product differentiation in the market and thereby premium differentiation and consequent market segmentation. In economics and marketing, product differentiation or simply differentiation is the process of distinguishing a product or service from others, to make it more attractive to a particular target market. Example 2 maximizingrevenue the demand equation for a certain product is p 6. At the low end the product is cheap and simply works. Start studying microeconomics vocabulary chapter 15. When tincreases, products are increasingly di erentiated for consumers. Section 5 elaborates on this theme for local competition. Pdf product differentiation and quality in food markets. Sep 19, 2019 product differentiation is a marketing process that strives to identify and communicate the unique benefits or qualities of a product compared to its competitors. Assume rm 1 located at a, and rm 2 at 1 bwith 0 a 1 b1. Product differentiation in quality, packaging, design, color, and style has an important impact on consumer choice. Hortacsu, ali and chad syverson, product differentiation, search costs, and the welfare effects of entry. Product differentiation and marketing strategies are most often undertaken by.
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