Product differentiation. Product differentiation and market power Market differentiation

In order to effectively plan a company's product strategy, it is necessary to understand whether its products - in the set produced by this company or in relation to competitors' products - belong to horizontal or vertical product differentiation.

Differentiation product means the selection of a product of a firm in the eyes of consumers from other products of this class. Differentiation is a form of non-price competition among firms. Product differentiation takes place as long as consumers themselves regard different brands as imperfect substitutes. In a certain sense, product differentiation is a subjective characteristic of consumer behavior. So, for example, although drugs produced by different firms may be identical in their chemical composition and in their therapeutic effect, if consumers believe that the products of different firms are different, they will behave accordingly, and therefore the product can be considered as differentiated. Conversely, if consumers evaluate goods that are different in their physical characteristics as homogeneous, as close substitutes, then these products will not be considered differentiated from an economic point of view.

Product differentiation can be both real - including differences in product quality, durability or other functional characteristics, or phantom. In the latter case, the differences in trademarks are purely external in nature, include changes in color, packaging, and appearance. Phantom differentiation can be attributed to differences in the distribution channels of a product, for example, when a seller of a low-quality product uses prestigious stores to sell his product as a camouflage strategy.

Product differentiation has two important consequences for the firm. First, product diversity creates a firm's bargaining power, since there are always buyers who are committed to the product of a particular brand or company. Accordingly, if buyers view different brands as imperfect substitutes that cannot fully substitute for one another, a firm can raise the price of its particular product above the price of competitors and not lose customers. Secondly, product differentiation is also beneficial for customers. When a firm enters the market with a new brand name, consumers get an even greater product variety that can better suit their preferences. Product differentiation expands consumer choice.

Horizontal product differentiation occurs when, between two products of the same product class, the level of any one characteristic increases while the level of any other characteristic decreases, so that the consumer chooses the "closest" product in terms of his preferences. For example, a consumer chooses among the variety of cakes according to the criteria of calorie content, the presence of fruits, the presence of chocolate. One cake can be chocolate, but without fruit. Another with fruit, but high in calories. The third is low-calorie, but without chocolate. In all such cases, economists talk about horizontal product differentiation. Horizontal differentiation can be represented as a straight line, along which various products stretch from one end to the other (Figure 4.3). Hence, another name for this species is spatial product differentiation.

Rice. 4.3.

Horizontal product differentiation has important implications for the firm. Since different characteristics of goods have different significance (value) in the eyes of different consumers, here the price cannot serve as a guideline for the purchase of goods. If the prices of two or more products in a market with horizontal differentiation are different (for example, the price of the first product is higher than the price of the second product), then this does not greatly affect the volume of demand. There will be non-zero demand for both more expensive and relatively cheap goods. But vice versa, if the prices of goods (P) are equal, this cannot serve as a guarantee of the presence of demand (Q) and the equality of the amount of purchases of goods:

if Pj FR 2(for example, Pj > P 2), Qj > 0; Q2 > 0;

if Рj = Р 2 , it can be like this: Q a Ф Q 2 or like this: Qj = Q 2 .

vertical product differentiation occurs when the level of all characteristics increases or decreases simultaneously for all consumers and products are ranked in accordance with a certain order, the same for all consumers. This happens when it comes to differences in the quality of the same product (Fig. 4.4). For example, pasta can be second grade, first grade, and premium; jewelry is distinguished by a different content of gold and silver; air travel can take place in business class and economy class.

Rice. 4.4.

In markets with vertical product differentiation, the price of a product plays a much more important role. At the same prices, only a higher quality product will be purchased; a low-quality product will not find demand. In order to sell goods of both high and lower quality, it is necessary to supplement product differentiation with price differences: if Pj = R 2, Qj > 0; Q2 = 0; in order for Qj > 0 and Q 2 > 0, it is necessary P x > P 2 .

A product of lower quality can only find adequate demand at a lower price. Here the market is segmented both in terms of quality and price.

A firm's competitive strategy in markets with vertical product differentiation is to 1) reinforce high quality so that the product becomes an exclusive purchase item for a few, and 2) weaken low quality even further so that the product is reduced by cost and price. - could acquire the widest segments of the population.

Question for thought

At one of the races in the framework of the Formula 1 competition, held in Malaysia, the winner of the race is the team Ferrari- was disqualified because the width of the new deflectors (the aerodynamic elements of her new car) differed from the regulated one by almost 10 mm (which allowed her to get a gain in car speed). Strategy Ferrari is a typical example of horizontal or vertical product differentiation?

Markets where the product is differentiated are called markets of monopolistic competition. An analysis of this type of market is presented in the E. Chamberlin model for a market with a large number of participants. In this case, they are present as features of a competitive market - more

the number of buyers and sellers, as well as the features of the monopoly industry - the presence of market power in firms - sellers of a differentiated product.

Since the firm has bargaining power in such markets, its individual demand curve will have a negative slope. Since there are no entry barriers to the industry (and this is a condition for the existence of this type of market), then in the long run the economic profit of firms cannot be positive, since if old-timers make positive profits, new firms - potential competitors will want to enter the industry. Another type of product will appear on the market. Some consumers will switch to a new brand, the individual demand of each firm will decrease. An increase in aggregate supply will lead to a fall in the price of the good. Conversely, if firms incur losses, then some firms will leave the industry, which will reduce the total supply of goods. Decreased aggregate supply will push prices up to break even.

Examples of markets with monopolistic competition are: the market for yogurt, the market for juices and soft drinks, the market for cell phones, the market for banking services.

In the market of monopolistic competition, the long-term equilibrium of a typical firm is reached where the price of a good is equal to the average cost of production (Fig. 4.5).

Since the average cost of output for an industry with monopolistic competition is, as a rule, )

 

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