Product Differentiation 

 Introduction

Consider a duopoly in which Bertrand competition prevails, i.e. each firm sets the price for its product. It is well known that these firms have no market power at all, if the product is homogeneous and firms have identical unit costs . In this case, there exists a unique Nash equilibrium and the market price equals in equilibrium due to the strong incentive to undereut each other's priee as long as prices exceed unit costs. If produet differentiation is introduced and eaeh firm produces a different brand, then competition is mitigated and one might conjecture that a higher degree of produet differentiation entails a lower degree of competitiveness on the market. That is to say, if product differentiation increases equilibrium prices go up. Indeed, Perloff and Salop (1985) introduce a model in which the degree of product differentiation can be parametrically varied and the above eonjeeture holds true in the following specifie sense: If symmetry with respeet to consumers' demand as weIl as with respect to unit costs holds and unit costs are constant, then a higher degree of product differentiation entails higher markups in asymmetric equilibrium. This raises the following question: Does the conclusion of Perloff and Salop hold more generally or does it crucially depend on the specific setting, in particular, the symmetry of the model (and of the equilibrium under consideration) and the assumption of constant unit costs? 

The economic intuition underlying the connection between product differentiation, market power, and returns to scale has been expressed by Anderson et al. (1992), p.1 f., in their comprehensive account of the theory of oligopolistic markets for differentiated products as follows: "Once it is recognized that consumers have idiosyncratic preferences, it follows that they are prepared to pay more for the variants that are better suited to their own tastes. It is these premia that are the source of market power for firms. Despite the wide diversity of tastes, the market is unlikely to support a large number of products because of increasing returns to scale in research and development, production, marketing and distribution. Such increasing returns are necessary for firms to exist." Moreover, they write : "Considering economies of scale in conjunction with taste diversity then implies that firms have some degree of  market power in the sense that any individual firm would not lose all its customers by changing its price slightly· .. , since some consumers will be willing to pay a premium for variants that better match their tastes." These statements certainly suggest to relax the assumption of constant units costs. Furthermore, symmetry is nowhere mentioned in these intuitive arguments. In this paper we give up the symmetry assumption with respect to consumers' demand and with respect to costs. Furthermore, we consider the case of strictly decreasing marginal costs . More precisely, we shall address the following questions:

i) How robust is the monotonicity result by Perloff and Salop (1985) and what does a more general theorem look like?

ii) What is the economic significance of the symmetry assumption underlying this result?

iii) How does the degree of product differentiation affect the existence of Nash equilibria if costs are strictly concave?

A natural framework for the comparison of Nash equilibria, which lies at the heart of the result by Perloff and Salop, is provided by the theory of supermodular games that has been developed in recent years.

This theory is based on seminal results by Tarski (1955) and by Topkis (1978, 1979), who also pointed out explicitly the usefulness of thc concept of supermodularity.

What is Product Differentiation ?

A Definition Product differentiation refers to the fact that different sellers typically sell different products, even though they are in the same general market. Product differentiation is prevalent throughout the economy . Markets in which sellers differentiate their products are much more common than those in which a homogeneous product is offered by many sellers .This study both summarizes what economists have to say specifically about product differentiation and its role in a free market system, and highlights the policy conclusions which flow from this type of analysis . 

 Spurious vs. Real Product Differentiation

While different brands within a given product class are typically at least somewhat different in their physical characteristics, consumers may perceive the differences to be much greater than they truly are. This exaggeration of product differences is known as spurious product differentiation. The extreme (but very rare ) cases where two products are physically identical yet consumers pe rceive them to be different will be referred to  as purely spurious product differentiation. Naturally, the concept of spurious product differentiation only arises in the context of imperfect consumer information about products . In such a context there is at least the potential for seller to manipulate consumers preferences through advertising in order to strengthen brand loyalty. 

Product variation refers to any change that alters ‘the physical characteristics of a product’ or ‘the conditions under which it is sold’ like changing the colour of a toothpaste tube. This is done by firms to raise their market share of a product. Consider, for example, the market for motor cars. The cars offered by suppliers range from the relatively cheap, ‘popular’ models like Maruti to the high priced quality cars like Ceilo or OPel Astra.

In the USA within the popular range there are models which are reasonably close substitutes so that a potential car buyer would review their merits and demerits before making final decision to purchase. Thus, it is possible to say that there are two markets for cars—a popular and a quality market. But in-between these two extremes there are other cars with varying qualities of performance and price.

Sources of Product Differentiation:

The sources of product differentiation are many:

(i) The first and most obvious is where one product is physically different from another. This may be due to differences in design and construction or in the materials used. Thus, T.V. sets offered by different suppliers will have variations in shape, size and look which make them recognisable one from another.

(ii) Secondly, some physical differences may affect standards of perform­ance. Better quality materials or greater precision of finish as in the case of Allwyn Prescold refrigerators may mean a longer life for the product. Better design may make it easier to maintain a product. This reduces running cost.

Such features are balanced against price differences in the minds of consumers in making their final decisions. However, some of these physical differences may be irrelevant to the functional performance of the product. A consumer is often ignorant about the quality of a product. An objective assessment of a product requires considerable technical knowledge.

(iii) Moreover, with the sale of a product goes a ‘package’ of services. Some retail shops provide credit to customers. In case of sales of durable goods like cars, promptness of after-sales services is important. There may be opportunity for returning or exchanging unsuitable goods like ready-made garments. These are planned differences in the product.

(iv) Furthermore, the sale of many goods are accompanied by the offer of ‘free gifts’ in a variety of forms. Examples include gift coupons, compe­titions with attractive prizes (as in the case of washing powders like Surf or Nirma) and providing advertisement support through sponsored pro­grammes (e.g., Sahara India Ltd. has been promoting cricket tournament in Canada). These are all short-term sales promotion measures.

(v) Another source of product differentiation arises from the different locations of buyers in relation to sellers even in case of identical products.

Two conditions must be satisfied for such local discrimination:

(a) Buyers must recognise the differences between the various sources of supply in delivery or collection costs, either in terms of money or convenience.

(b) Buyers must be required to pay the full delivered costs of the goods supplied by each seller.

In the words of Noel Branton, “The impact of product differentiation on market structure depends on the ability of some firms to secure strong advantages over others in this field. This may be the result of heavy advertising and other forms of sales promotion.”

Importance of Product Differentiation:

Regarding the importance of ‘product differentiation’ the following two points may be noted:

(a) Product differentiation often acts as a barrier to entry of new firms into the industry. It may also be noted that advertising enables a firm to achieve product differentiation.

Thus advertising, as Lipsey has pointed out, act as an empty barriers. Well-established firms possess an advantage. They turn out products which are already known to the customers as compared with new unknown products. New firms will have to reduce their prices or improve the quality of their products considerably to enter an industry.

These may impose losses upon them. If people judge quality by price, the new products may be branded as inferior to the established ones. Alternatively, a newcomer may have to incur heavy sales-promotional expenses to try to sell within the prevailing price range.

(b) Profitable product variation may go in various directions. A producer might find that a costly change in his product would increase demand for his output. (For example, a petrol station may moves from cheap location to one that is more expensive, but also more convenient for its customers.) Or he might find that downgrading his product would lower his costs more than it would lower demand for his product and would increase his profits. For example, many producers try to maximise profits by cutting their prices and offering discounts (They provide no credit and little sales help).

Why Is Product Differentiation Important?

The increased competition has divided the demand among different players in the market. This has made it very important for businesses to make their customers understand what different they have to offer.

Besides making the product survive in the market, product survive in the market, product differentiation is important for the following reasons:

• Product differentiation translates the product attributes into benefits.
• It answers the biggest question of the customers – ‘What’s in for me?’.
• It gives the customers a reason to purchase the brand’s product and repeat the purchase.
• It increases the recall value of the product.
• It increases brand loyalty and builds brand equity. 
• Attribute-based differentiation is important for the brand to defend their price from levelling down to the bottom part of the price spectrum.

Product Differentiation Types & Factors

Differentiation depends on customer perception. It’s not how the brand sees its product, it is how the customer recognises the product. There are three types of product differentiation:

1. Horizontal differentiation: Distinctions in products that cannot be evaluated in terms of quality. E.g.: Mineral water brands.
2. Vertical differentiation: Distinctions in products that can be evaluated in terms of quality. It’s a case where it is possible to say that one good is better than the other.
3. Simple (or Mixed) differentiation: Differentiation based on numerous characteristics.

A product can be differentiated based on:

• Price: The price is the most common determinant of which target group will be attracted to a brand’s product. It separates a premium product from econmical products. Example: Zara’s products are considered premium products.
• Features: Features like size, shape, ingredients, origin, etc. differentiate products in the same price spectrum. They also help the brand to back their high pricing decisions.
• Performance & Quality: A good quality product always stands out from standard quality products. Example: Duracell lasts 10 times longer than ordinary batteries.
• Reliability: Some products are known to be more reliable than others. That is, there is a less probability of them malfunctioning or failing within the given time period.
• Looks: Looks play a very important role in differentiating the product especially in the case of apparels and other luxury products.
• Channels of Distribution: Channels of distribution also plays a vital role in differentiating a product from the competition. For example, Amway uses a selective distribution strategy to position itself as a quality brand.
• Complexity: The level of complexity of usage of a product plays a very important factor in differentiating products, especially in the technology industry.
• Location: Manufacturer’s location, brand’s home country, and retailers’ location play an important role in differentiating a product from its competitors.
• Marketing efforts: Marketing efforts give rise to the brand image which is a decent product differentiator. Other marketing efforts like sales promotion act as an add-on to differentiation strategy.
• After-sale services: Good after sale services  make the customers have faith in the brand and make them differentiate it from others.

Services as offering add many more factors of differentiation. These are ease of ordering, delivery (on time or before time), experience, company-customer relationship, personalization, etc.

Product Differentiation Examples

A person doesn’t need to travel to places to witness examples of product differentiation. Product differentiation can be witnessed in grocery stores, TV advertisements, and even when you choose Facebook over Google+.

Examples Of Simple Product Differentiation

• 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.
• 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.
• Choosing to order a product on Amazon than to visit Walmart as the customer doesn’t want to leave his house.

Examples Of Vertical Product Differentiation

• Intel i3 and Intel i5. The customer clearly knows the difference between the two and chooses one according to his preference.
• Choosing Duracell over other batteries because the customer believes that it lasts longer.

Advantages Of Product Differentiation

Besides being an imperative for survival in the competitive market, product differentiation has the following advantages:

• Creates Value: Product differentiation gives a reason to the customers to choose the brand over others.
• Helps in defending high prices: It helps the companies to give a reason why they charge a high price for their product.
• Helps in non-price competition: It allows the companies to compete in areas other than price.
• Creates brand loyalty: A successful differentiation strategy creates brand loyalty among the customers.
• Creates a perception of no close substitutes: A successful product differentiation strategy may create a perception among the customers that there isn’t any substitute available in the market.

Disadvantages Of Product Differentiation

• Added pressure on the manufacturers: Product differentiation adds a substantial amount of pressure on the manufacturers to decide which attribute could turn out to be the USP for that product.
• Can increase prices: Sometimes, differentiating a product adds to the production and marketing costs which can be transferred to the end-users.
• Increased Revenue Not Guaranteed: Product differentiation doesn’t guarantee more sales and more revenue as a business can even fail in predicting whether the customer would appreciate the USP or not.

Differentiation and Price: The Legacy of the Neo–Classical Economic Perspective

Most views on product differentiation are based upon neo-classical economic theory. It is thus normal to construct all analyses with price and product clearly segregated. The conceptualisation of product differentiation subsumes firms “facing a downwards sloping demand curve”. The suggested objective of product differentiation is to reduce the substitutability by competing offerings and so steepen the slope of the demand curve. By doing so, the firm is said to be able to enjoy higher prices with a less than corresponding reduction in volume, hence it is potentially able to earn superior profits. Its customers are less sensitive to price rises or to competitors’ price drops.

The separation of “product” attributes from the attribute of price encourages the view that offering low prices is a fundamentally different form of differentiation to that of differentiating on “other features”. In this vein, the former industrial economist, Michael Porter’s (1980) definition that a firm (or more correctly, brand) is differentiated “when it provides something unique that is valuable to buyers beyond simply offering a low price” is quoted frequently, reinforcing the view that price can not be used to differentiate. Yet paradoxically other moves to reduce the costs of purchase for a customer (eg home delivery for takeaway pizza) are classed as differentiation attempts. There does not appear to be a valid justification to distinguish price from other features of an offering. It follows then that differentiation is not an optional strategy for superior profits as is popularly thought (e.g. Porter 1980; Dess and Davis 1984; Porter 1985; Narver and Slater 1990 ).

This discussion raises the question, why have economists (and others) always equated price as a dependent variable in their discussions of the nature of differentiation, when it appears sensible to include it as a component ? The reason can be traced back to the objectives of economics itself. Economics has always been concerned with the efficient allocation of scarce resources. The question of how resources should be allocated was answered by whether resource use attracted an inflow of money - the mode of exchange - from the marketplace sufficient to cover costs and earn at least normal profits. If an entrepreneur allocated resources to a particular sector of the economy, the efficacy of that decision would be reflected in whether consumers would “vote” with their spending dollars, that is, sacrifice monetary value for value in goods or services.

This, together with the fact that price is easily measurable and highly divisible, led to the implicit assumption that price, or the financial aspect of purchase cost, was the sole measure of value “exchanged” between buyers and sellers: a sum of money for an equivalent value of goods. It was a logical step, then, to construct measures of resource allocation (supply and demand curves) based on price and quantity.

It is true that purchase price (money paid) is a highly visible “cost” or impost to the buyer; and is also easily understandable as value in exchange to the seller. In other words, the buyer parts with something and the seller receives something. Ceterus paribus a reduction in purchase price means less value in exchange for the seller and more value in exchange for the buyer.

In contrast, some other variables which influence demand, such as advertising for example, could certainly be seen as a cost to the seller to undertake, but unlike price not something that the buyer parted with, or which if reduced, would not increase any benefits to the buyer (other than if the firm chose to channel the money it saved on advertising to lower prices, an approach seen by many economists as highly desirable). Therefore a variable such as advertising was not seen as comprising value in exchange, particularly for the buyer, indeed the presence of such variables was seen as an “imperfection”. This meant that the other components of an offer which influenced demand (such as advertising, or style) did not fit with the neoclassical economists notion of efficient resource allocation and so were not included in the supply/demand equation.

However, there are components (other than price) to any offering which are both “costs” to the buyer and constitute value either preserved or given away by the seller. To continue the example, advertising, or more correctly its effect, can be seen as a component of value in a purchase that both the buyer and seller “part with” or “give up” in exchange. A buyer may choose to forego the value(s) provided by a luxurious brand image, for example hedonistic pleasure, reassurance, or self projection/signalling, in favour of other features such as quicker service or shorter travel time provided elsewhere. The seller parts with advertising funds and other expenses to  create a luxurious brand image in an effort to attract custom. The more this costs the seller to undertake, the less value the seller is able to preserve in exchange. Alternatively the buyer might forego the value of quick service, a cost among other costs, to obtain a luxurious brand image.

In other words, from a customer’s perspective, price is only one aspect of the cost of purchase and/or consumption, and many other features of the offering contribute to the cost of gaining the benefits which are desired. These costs include delivery, ease of use, and after sales service.

From the firm’s perspective price is often thought to be different from “other features” because of its relationship to profitability via the profit margin, but expenditure or savings on “other features” has the same relationship. A firm may gain extra custom from offering quicker service, for example, but this can have the same effect on company profit margins as lowering price.

Similarly, distinguishing between firms that differentiate on price and firms that differentiate on “other features”, as Porter (1980; 1985) did, appears problematic. The obvious consequence is a demarcation between up-market and down-market offerings. This implies, according to Porter’s framework, that the middle ground is associated with a low profitability “stuck-in-the-middle” strategy. Porter stated this was likely to occur if the firm had neither a clear differentiation advantage leading to premium prices, or did not have a clear cost advantage, often synonymous with very low prices. However, this does not appear to fit the empirical world where many “down-market” firms are poor profit performers as are many “up-market” firms, and the middle ground can be occupied by firms earning superior profits. The other implication of this widely adopted framework is that differentiation must increase costs (since differentiation is the alternative to low costs); a viewpoint echoed by many marketing authors (e.g. Bradley 1991 ch. 4; Mason and Ezell 1993 ch. 3; Saunders 1995) and also strategic management scholars (eg. Pearce and Robinson 1991 ch. 7 ; Wheelan and Hunger 1998 ch. 5). Yet evidence shows that many firms achieve low costs yet also have differentiation strategies (Miller and Freisen 1986; Miller and Friesen 1986).

As we have stated differentiation has been very much associated with obtaining a price premium. This is intuitively attractive in helping to explain increased profitability but it is overly simplistic. Just as price premiums have been rejected as ways of measuring brand equity (Blackett 1991), price premiums are an inadequate way of measuring differential advantage. Many offerings do not have generic equivalents from which the premium can be calculated. Does a Mars bar sell at a price premium? A premium over what? Decisions to sell at a low or a high price depend upon the firms desire for sales volume and other strategic considerations and so will often not serve as an identifier of profitability. Obviously the relationship between price and profit depends on cost. Very often firms opt for lower prices which will in turn lower their selling costs (e.g., advertising and costs of gaining distribution), and so in this situation, low price can certainly not be tied to low profitability or vice versa. Can any offering which sells at more than the average within the category be said to have a differential advantage? What if it is over-priced and sales are poor? Do brands priced “below product category average” have no differential advantage (e.g., Bi-Lo, Walmart, Daihatsu)? In the 1990s, in many industries, there has been a trend towards realistic pricing of leading brands (e.g., Proctor and Gamble’s “everyday low pricing” policy). These brands/firms can certainly still be said to possess a differential advantage because they have a collection of features which is attractive to buyers and which earns superior profits for their owners. 

Almost any unique bundle of features will have some customers who are willing to pay a high price for it. The actual price a firm charges depends on which customers, and how many, it desires (together with cost constraints). Sometimes it is more profitable to give discounts to gain business, other times it is more profitable to change some other feature of the offering. The simple point is that the more similar a firm’s offering to that of a competitor the greater the need to change something. There are many routes to differentiation and changing the monetary cost of acquisition (price) is just one of them. The strategy discipline needs to move to a less restrictive definition of differentiation - one that sees it simply as the development of loyalty, or more correctly, customer preference for one offering over another.

As discussed, the traditional idea of differentiation being able to deliver a price premium is derived from demand curve analysis. Differentiation results in some customers having a preference for the offering (assuming the differentiation matches some demand heterogeneity which exists in the market) and they are therefore less sensitive to price drops of competing offers. The firm (or rather the brand) therefore faces a steeper demand curve: 

This analysis is mathematically elegant, but it simplifies the true effects of differentiation and has had the effect of misleading decades of practitioners and academics. The implication that a price premium is the reward of differentiation is a gross simplification. Customers, if they value the firm’s offer will be less sensitive to aspects of competing offers, and price may, and may not, be one of these aspects. This can be illustrated easily with the example of Franklins, for many years, a star performer amongst Australian supermarket chains. Franklins is differentiated, appealing to a particular market demand, one which highly values low financial costs of purchase (i.e., the price sensitive segment) but is less concerned about other features, and it is this latter aspect which allows for the possibility of successful (profitable) differentiation. Franklins enjoys sales from this segment because the customers in this segment have a lower sensitivity to other features of the typical supermarket: availability of parking, range of products, width of supermarket aisles (ease of shopping). Franklins only stocks dry goods (i.e. no fresh food), which are served straight out of their packing boxes, the range is limited, and the stores themselves are typically small and cramped. The point of this example is that Franklins does not enjoy reduced price sensitivity because of its differentiation8. Its customers are still highly price sensitive, and on a simple price-demand curve it would not show a highly sloping demand curve. Franklins benefits not from reduced sensitivity to price, but reduced sensitivity to other features of the offering. Its sales are translated into healthy profits because it operates within a market segment sensitive to factors which Franklins is in a good position to satisfy; this segment also being insensitive to other factors which Franklins has chosen not to satisfy (thus saving costs) and is not in a good position to satisfy. 

Profit from Reduced Sensitivity

This view of differentiation can be illustrated with modified demand curves, which substitutes price for other features of the offering, eg breadth of product range (Franklins has a smaller product (and brand) range than most of its competitors). 

The implications of this example are not limited to firms that target price sensitive consumers. A firm will benefit from reduced sensitivity to any feature that incurs costs to deliver. It is therefore strategically sensible to differentiate on an aspect of the offer which some customers value (that the firm has some advantage in delivering) and that results in decreased sensitivity to something that is relatively costly for the firm to deliver (or expressed another way, relatively cheap for competitors to deliver).

To re-cap, profits flow from being able to mitigate the effects of competition, being different is a pre-requisite for this, and the closer other firms marketing efforts are to one’s own the more intense is the competition one faces and the potential for earning “monopoly” profits are reduced. To understand competitive advantage and why some firms earn more profits than others a framework is needed for understanding the ways in which firms make themselves (their brands) different from each other and how this impacts on the volume they sell, the price they are able to obtain, and the costs of providing this difference. Sometimes being very different is a route to profits, it certainly mitigates the effects of competition, but it can also limit share. Differentiation is a necessary but not sufficient condition for above average profitability. 

Differentiation has a positive effect on profits when the difference that is valued by the market but is cheap/easy for the firm to deliver. Downward sloping demand curves (whether they are constructed with price or any other feature on the Y axis) do not guarantee superior profits. Reduced sensitivity to a feature provides the firm with little benefit if that feature is not costly to deliver. Similarly, excelling in the delivery of a feature (the differentiation basis) is of little advantage if the firm is not better equipped than competitors to provide that feature. In other words a firm’s resource differentials matter just as much as the differentials in firm offerings. Market demand structure also matters. Profits are derived not only from the degree of reduced sensitivity to features provided better by competitors but from the number of customers which have this reduced sensitivity. Reducing customer sensitivity to price is only one of numerous ways in which firms can gain in profits - depending on the match between their asset base and the attributes they choose to differentiate on. 

Differentiation in the Real World

Given that there are multiple avenues for differentiation, and the many features that a firm can decide to over or under perform in providing, one might expect markets to be full of wildly differentiated brands. But we observe two factors that change this picture.

Firstly, differences in customer awareness, brand familiarity, knowledge of product features, situational factors and distribution all combine with habits (e.g., brand loyalty) and variety seeking to produce brand preferences. So differentiation becomes a fundamental aspect of most markets, even if firms do not try to differentiate their brands. This differentiation is often buying situation specific rather than being a permanent feature of the brand, eg, sometimes the store is closest to the customer, sometimes it is not (dependent on where the customer is at the time).

Secondly, there are few substantial feature differences between brands. This is because firms work very hard to match their competitors. If any brand brings out a product variant that is different (eg, airbags, a caffeinefree version, a new colour) competitors quickly add this to their brand’s portfolio of variants (Ehrenberg, Barnard, and Scriven 1997). 

Therefore we have the situation akin to differentiation being “everywhere and nowhere”. Substantial and meaningful product feature differences between brands is not as common as one might expect given. Brands typically enjoy some differentiation, usually from things other than product feature differences, but it is more a market feature than a brand specific feature. Firms may strive for extra differentiation for their brand but the second point noted above (imitation) makes this difficult. In addition many firms are wary about being too different: no firm wants to “cut itself off” from part of the market. Being “cut off” can be a consequence of offering something that appeals to a segment (and hence not others).

This view of differentiation is supported by recent research on segmentation and price elasticities. Competitive brand user profiles do not appear to differ, that is to say, brands sell to much the same types of buyers (Kennedy and Ehrenberg 2000). If brands were substantially differentiated then we might expect some differences in the types of buyers they appealed to. Likewise price elasticities seem remarkably consistent between brands with a predictable difference between large and small brands (Scriven and Ehrenberg 1999). 

If some brands in a category were more or less differentiated than other brands we should see some partitioning in the market, where some brands competed less, or more, closely. The widespread fit of the Dirichlet model of repeat-purchase, which assumes no partitioning, is solid empirical evidence than partitioning is rare and slight. This is supported by the widespread fit of the ‘Duplication of Purchase law’ (Ehrenberg 2000).

Therefore, we have a picture where brands are differentiated, but the degree of differentiation is fairly standard within the product category. Each brand competes with the same ‘closeness’ to any other brand.

This is not to say that there aren not reasonably common examples of across buying situation differentiation, that is, brands that are preferred for the same reason by buyers in difference buying situations. Our Franklins example earlier is such an example and in most categories there are competitive brands at slightly different price/quality points. Other than this, major functional differences between brands are unusual because most functional differences can be copied. Even patented technological advantages seem to be matched extraordinarily quickly. An interesting observation we make (one that deserves some empirical investigation) is that many of the cases of relatively enduring across buying situation differentiation seem to involve differences in design. For example, Apple’s iMac, Alessi kitchenware, Volkswagon’s VeeDub, and Herman Miller’s Aeron chair. Perhaps this is because design is a subjective thing and competitors are unwilling to copy something that is not universally liked. Alternatively, perhaps it is because quality design is extraordinarily difficult to match – good creativity is genuinely original.

Conclusion

In this article we explained why differentiation is a necessary, but not sufficient condition to earning superior profits. In doing so we have clarified some misconceptions concerning the mechanism through which this profit is achieved, i.e., it need not be via a price premium. We have presented a view of differentiation that is about making the offer different in response to differences in demand (demand heterogeneity). This may be achieved through altering any aspect of the offering (not just produce features), including the financial cost of acquisition (i.e., price charged). 

Differentiation is when a firm/brand outperforms rival brands in the provision of a feature(s) such that it faces reduced sensitivity for other features (or one feature), through not having to provide these other features the firm has an avenue to save costs. The firm benefits from the reduced sensitivity in terms of reduced directness of competition allowing it to capture a greater degree of exchange value.

Thus differentiation provides a firm with something of a “mini” or weak monopoly. However, as a final note, we reject (in line with Hunt and Morgan (1995)) the pejorative connotations of the term “monopoly”. Differentiation is not a sign of sub-optimal markets, nor of socially undesirable firm strategy, but is a natural reaction to heterogeneous market demands and heterogeneous firm resources. A lack of differentiation could mean less customer utility and sub-optimal utilisation of firm (society’s) resources. But this seldom if ever happens, instead differentiation is a pervasive and almost unavoidable aspect of real competitive markets.