Product Differentiation

PRODUCT DIFFERENTIATION
GROUP 3: Anirban Bhattachrya Abhishek Jaiswal Shreya Shukla Pavan Naidu Vaishnavi Karthik Bollineni
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. 2. 3. 4. 5. 6.
Product differentiation Many firms Free entry and exit in the long run Independent decision making Market Power Buyers and Sellers have perfect information
EXAMPLES OF MONOPOLISTIC COMPETITION

Banks Radio Stations Clothing Computers Frozen Foods Canned Goods Sporting Goods Fish and Seafood Jewellery Health Spas Apparel Stores Convenience Stores
There are two types of demand curves in monopolistic competition -
Perceived demand curve:

The perceived demand curve gives the maximum quantity of a monopolized goods that the monopolist thinks he can sell as a function of his price, given his market observations.
Proportional demand curve:

The proportional demand curve gives the maximum quantity that a monopolist can sell actually at a price. The proportional change in the quantity of demand with proportionate change in the price of the goods.
Perceived demand curve and proportionate demand curve

Price
P1 P2 Dpe
Dpo Q1 Q3 Q2
Quantity
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

Image Hunger
Comfort Cleanliness Beauty Status
Style Taste
Safety Quality Service Accuracy
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

11
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.
12
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.
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. 13
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
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)
CONTD
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
CONTD
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
Demand and price Marginal
revenue
OUTPUT
A Monopolistically Competitive Firm Earning Profits in the Short Run

The firm faces a downward-sloping D curve. At each Q, MR < P. To maximize profit, firm produces Q where MR = SMC. The firm uses the D curve to set P.
Price profit P ATC D MR Q Quantity

SMC SATC
A Monopolistically Competitive Firm With Losses in the Short Run

For this firm, P < SATC at the output where MR = MC. The best this firm can do is to minimize its losses.
Price
SMC
losses SATC P D MR Q
SATC
Quantity
Monopolistic Competition and Monopoly

Long run: In monopolistic competition, entry and exit drive economic profit to zero.
If profits in the short run:

New firms enter market, taking some demand away from existing firms, prices and profits fall.
If losses in the short run:

Some firms exit the market, remaining firms enjoy higher demand and prices.
A Monopolistic Competitor in the Long Run

Entry and exit occurs until P = LATC and profit = zero.
Price LMC LATC
Notice that the firm charges a markup P = LATC of price over markup marginal cost and does not produce LMC at minimum LATC.
Q
D MR Quantity
Excess capacity and excess cost

1. Excess capacity
The difference between the level of output

indicated by the lowest on the LATC curve and the monopolistic competitors output when in long run equilibrium Under perfect competition, firms produce the quantity that minimizes ATC.
2. Markup over marginal cost
Under monopolistic competition, P > MC. Under perfect competition, P = MC.
Excess cost per unit and excess capacity

Price
MC
Price
ATC
Excess cost
MC
Demand
MR 0
Quantity produced
Efficient
scale
Quantity
Excess capacity
MONOPOLISTIC COMPETITION
27

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PRODUCT DIFFERENTIATION

 Characteristics of monopolistic competition:

EXAMPLES OF MONOPOLISTIC COMPETITION

There are two types of demand curves in monopolistic competition -

Perceived demand curve:

Proportional demand curve:

Perceived demand curve and proportionate demand curve

Product Differentiation - A Definition

 Increase the perceived value of firms

 Create a customer preference for firms

Characteristics Of Product Differentiation

 Rather than being a price taker, each firm faces a

 Advertisement and Packaging:

A Base of Differentiation must fill some customer need

Example: Fred Smith FedEx

Horizontal differentiation can be linked to differentiation in

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

 The supplier of many versions decides a unique price for

 The shape of the product (VAIO)

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

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

 Locating next to a freeway exit (Motorway exit)

 Creating a unique product for a customer

 Creating brand loyalty

 Creating reputation for brand

New technology and innovation Durability Quality

Middle class car Versatile Economic

High pricing Status & styling Intelligent engineering

DEMAND CURVE FOR A MONOPOLISTIC COMPETITIVE FIRM

Demand and price Marginal

A Monopolistically Competitive Firm Earning Profits in the Short Run

Price profit P ATC D MR Q Quantity

A Monopolistically Competitive Firm With Losses in the Short Run

Monopolistic Competition and Monopoly

 If profits in the short run:

 If losses in the short run:

A Monopolistic Competitor in the Long Run

Price LMC LATC

Excess capacity and excess cost

 The difference between the level of output

2. Markup over marginal cost

 Under monopolistic competition, P > MC.  Under perfect competition, P = MC.

Excess cost per unit and excess capacity

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Characteristics of monopolistic competition:

Increase the perceived value of firms

Create a customer preference for firms

Rather than being a price taker, each firm faces a

Advertisement and Packaging:

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

The supplier of many versions decides a unique price for

The shape of the product (VAIO)

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

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

Locating next to a freeway exit (Motorway exit)

Creating a unique product for a customer

Creating brand loyalty

Creating reputation for brand

If profits in the short run:

If losses in the short run:

The difference between the level of output

Under monopolistic competition, P > MC. Under perfect competition, P = MC.