PRODUCT DIFFERENTIATION

GROUP 3:Anirban BhattachryaAbhishek JaiswalShreya ShuklaPavan NaiduVaishnaviKarthik 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.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 Fish and Seafood

Clothing Jewellery

Computers Health Spas

Frozen Foods Apparel Stores

Canned Goods 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 curvePrice

QuantityQ2Q3Q1

P1

P2

Dpo

Dpe

Product Differentiation - A Definition

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

Increase the perceived value of firm’s products(or services) compared to competitor’s products (or services)

Create a customer preference for firm’s 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 of-

1.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

FedEx12

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.

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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. 14

Basis of Differentiation

1) Product Attributes

2) Firm-Customer Relationships

3) Firm Linkages

• exploiting the actual product

• exploiting relationships with customers

•exploiting relationships within the firmand/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)

…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

division2)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

channels5)Co branding

Starbucks inside a Barnes and Noble store

COMPETITIVE ADVANTAGE

A product differentiation strategy must meet theVRIO 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.

‣Middle class car‣Versatile‣Economic

‣High pricing‣Status & styling‣Intelligent engineering

‣New technology and innovation‣Durability‣Quality

DEMAND CURVE FOR A MONOPOLISTIC COMPETITIVE

FIRM

OUTPUT

Price and marginal revenue

Demand and price

Marginal revenue

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.

D

profit

ATC

P

Quantity

Price

SATC

MR

SMC

Q

losses

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.

Quantity

Price

SATC

Q

P

SATC

SMC

D

MR

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.

Notice that the firm charges a markup of price over marginal cost and does not produce at minimum LATC.

LATC

Quantity

Price

D

MR

Q

LMC

LMC

P = LATC

markup

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 competitor’s 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

Quantity

0

MC

ATC

Quantityproduced

MC

MR

Demand

Price

Efficientscale

Excess cost

Excess capacity

MONOPOLISTIC COMPETITION 28