Question

Consider two running shoe companies, Abebe and Haile, each of which produces a shoe made specifically for marathon racing. Abebe offers the shoe in one color scheme, while Haile allows consumers to choose their own color combination from a menu of ten colors. Aside from color, Haile shoes and Abebe shoes are very similar. Haile also has a lenient return policy that allows its customers to receive a full refund for their purchased shoes if they are dissatisfied for any reason, while Abebe customers are unable to return their shoes under any circumstances. Which form or forms of product differentiation does Haile use to distinguish its racing shoe from that of its rival? Check all that apply. Location, Physical Differences, Prestige, Service.

Part 2:

True or False: Higher long-run product price can occur as a result of advertising in a monopolistically competitive market.

Answer 1

Haile uses Vertical form of product differentiation and Horizontal form of product differentiation as Haile gives a a lot of benefits to the consumers.The return policy of Haile is very easy and smooth compared to that of Abebe.

Location- Both the shoe companies produce shoes that are used for marathon racing. And it is widely available across the city.

Physical differeo-abebe offers shoe in single colour, i.e., color option is not available in this shoe company whereas in the case of Haile, there are 10 color options available.

Prestige-From the above question it is clear that there is difference in prestige in both the companies. Haile is more prestigious than Abebe as it is more consumer friendly than Abebe.

Service - The service of Haile is better than that of Abebe as both produces similar type of shoes yet the return policy is different. Exchange policy differences enable customers to prefer more Haile products compared to Abebe products.

As Haile’s shoes are available in more colors than Abebe’s shoe so there is horizontal product differentiation. On the other hand we see difference in return policy too, so vertical product differentiation also prevails here.

Part 2:

Yes, it is true that higher long run product price can occur as a result of advertising in a monopolistically competitive market as firms in monopolistic mariket is a price setter and not a price maker to some extent.