Question

Open a new thread on the discussion board. Many product markets in the United States are monopolisticaly competitive due to the use of product differentiation. What is product differentiation? How does product differentiation give a company market power especially over pricing? Give one or two examples of products that sustain higher pricing due to product differentiation. Is this justified?

Answer 1

Meaning: Differentiation business - level strategy involves producing unique products and services
and charging a premium price, targeting consumers who are relatively price-insensitive.

1. Situations / Requirements: Differentiation strategy requires
a. Suitable facilities to attract scientists and creative people,
b. Strong coordination between the R&D and marketing functions, and
c. A possibility of creating customer loyalty by offering special features.

2. Effect: Differentiation strategy allows a firm to charge a higher price for its product and to gain
customer loyalty because customers may become strongly attached to the differential features.

3. Advantages: Successful differentiation can lead to:
• Premium Price for the firm
• Sustaining Competitive Advantage
• Increase in number of units sold
• Increase in Brand Loyalty by the Customers.
• Improved Service,
• Less Maintenance,
• Greater Convenience or More Features,

4. Risks: Differentiation strategy will not be successful if
a) Standardised products are sufficient to meet the customer needs.
b) Competitors quickly copy the differentiating special features of the product.

5.Examples:
a)Choosing an iPhone over an Android as the customer considers iPhone to be a status symbol and believes that it has an easier interface as compared to Android.
b)Choosing a Tag Heuer watch over Titan as the customer prefers a Swiss watchmaker. Plus, he believes that Tag Heuer is a better brand than Titan.