GRAPHICAL ANALYSIS: The process of investigating economic phenomena in a systematic manner using graphs and diagrams. Graphical analysis is a common type of economic analysis.
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Slight differences that exist between two or more goods that are essentially the same and which satisfy the same basic want or need. This is generally pursued in monopolistic competition and oligopoly by firms seeking to increase sales and profit. Many of the best known businesses in the economy practice product differentiation to gain an advantage on the competition and to acquire a bit of market control. For example, Coca-Cola and Pepsi-Cola are very similar, but each has a few differences in terms of taste, packaging, and esteem. With product differentiation, each producer gains a bit of market control and is able to charge a slightly (or even a significantly) higher price for their product. While some product differences are only in the minds of the buyers, others are very real and let consumers satisfy the hidden nooks and crannies of their desires. In fact, product differentiation adds the variety that spices up the lives of consumers. Product differentiation is usually achieved through advertising.
Three DifferencesProduct differentiation is usually achieved in one of three ways: (1) physical differences, (2) perceived differences, and (3) support services.
- Physical Differences: Physical differences arise when the product of one firm is physically different from the product of other firms. These differences can exist due to materials used, chemical composition, shape, size, taste, or color.
For example, the most popular product of Manny Mustard's House of Sandwich is the Deluxe Club Sandwich. While many restaurants sell club sandwiches, Manny makes his with barbecue sauce rather than mayonnaise. It is similar to other club sandwiches, but slightly different.
Another example is offered by the Fleet Foot 30 running shoe produced by the Master Foot Company. The Fleet Foot 30 has ankle stabilizers and an extra thick cushioned insole. Other running shoes, such as the OmniFast 9000 sold by OmniRun lacks both of these features, but it is available in five different color schemes and uses velcro fasteners rather than shoestrings.
- Perceived Differences: Product differentiation can also result from differences perceived by buyers, even though no physical differences exist. Such perceived differences are usually accomplished through advertising, especially by establishing brand names. Brand names, in fact, are a common way to create the perception of differences among products, even if none physically exist.
For example, OmniGuzzle gasoline is chemically identically to Bargain Discount Fuel gasoline. However, due to years of intense OmniGuzzle advertising that has burned the OmniGuzzle brand name into buyers brains, most are absolutely convinced that OmniGuzzle is a "higher quality" gasoline.
However, as far a demand is concerned, perceived differences work just as well as physical differences. It matters not whether the differences are real or perceived, so long as buyers are willing to pay different prices.
- Support Services: Products that are physically identical and perceived to be identical can also be differentiated by support services. This is quite common in retail trade. One store offers "service with a smile," while another provides convenient parking, and a third has a 90-day money back guarantee. Even though the products are identical, differences exist in the "overall package" of product and support services.
For example, several independent stores might sell Master Foot brand athletic shoes. Buyers know that Master Foot shoes are the same regardless of who does the selling. No physical, nor perceived differences exist. Mega-Mart Discount Warehouse Super Center has self-service shelves filled with Master Foot brand athletic shoes. Customers find their sizes and head to the check out register.
Bobby's Bunion-Free Footware, in contrast, provides individual service, money-back guarantees, extended warranties, and service with a smile. Bobby's Bunyon-Free Footware wants the perfect Master Foot brand athletic shoe that will fit each buyers' active lifestyle. While the shoes are the same, Bobby's Bunyon-Free Footware offers different support services and thus a different overall product package.
The Bad and the GoodAlthough product differentiation is often singled out as the prime source of inefficiency with monopolistic competition, it probably promotes more good than bad. A comparison between perfect competition and monopolistic competition suggests why this might occur.
The primary difference between the idealistic, theoretical extreme of perfect competition and the real world of monopolistic competition is product differentiation. If monopolistically competitive firms sold identical products, then they would come much closer to matching the efficiency of perfect competition.
Overall, however, product differentiation is not such a bad thing. Considering the second rule of subjectivity, people have different wants and needs that are satisfied with different goods. Variety is very much the spice of life.
Consider something as fundamental as food. Duncan Thurly might prefer his club sandwich with barbecue sauce, while Winston Smythe Kennsington III prefers his with mayonnaise. If all club sandwiches are made with exactly the same ingredients, then one of these consumers suffers. Duncan is forced to eat his with mayonnaise or Winston has to have his with barbecue sauce. Or, heaven forbid, all club sandwiches are prepared with mustard.
Product differentiation is what allows consumers to fulfill the little nooks and crannies of their individual wants and needs. A little efficiency is sacrificed in return for product differentiation and the variety that this enables. In fact, every now and then Duncan might actually PREFER a club sandwich with mayonnaise, or maybe even mustard.
With perfect competition, however, such variety does not exist. With perfect competition there is only one type of club sandwich. Or taken to the extreme, there is only one generic type of "food," a gloppy, pasty substance that provides 100% of all daily nutritional requirements. There is no variety with perfect competition.
This indicates why perfect competition is relegated to the rank of theoretical ideal. Human beings are unlikely to stand for the type of generic goods offered by a perfectly competitive world. People demand variety. People demand product differentiation. And even if the ideals of perfect competition and identical products are imposed on the world (probably by a meglo-maniacal economist who has taken over the world), human beings would revolt and seek out product differentiation.
Monopolistic competition, as such, is not just the imperfect world's feeble attempt to achieve the economic ideal of perfect competition. It is actually a market structure that is ideally suited for the complexities of real world.
PRODUCT DIFFERENTIATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 4, 2024].
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