Chapter 12, Problem 1QFR

To determine

Product Differentiation

Explanation of Solution

Product differentiation is very essential component of monopolistic market. Monopolistic market is an imperfect market situation where a large number of sellers sell their products which are distinct from one another. Product homogeneity leads to close substitutes to a particular product of a firm and this causes the firm to exercise no monopoly power in the market. So, product differentiation is the only way to achieve monopoly power for competitive monopolist firm.

In economics, 3 types of product differentiation are found.

1. Vertical differentiation: When the customers compare one product on the basis of its quality it's called Vertical differentiation. One example of this scenario is − while purchase of biscuits a consumer can decide between two popular companies' produced biscuits.
2. Horizontal differentiation: When products are differentiated in such a way that the consumers cannot easily evaluate them on the basis of their quality only, it's called Horizontal differentiation. In this case, the consumers are not so clear about the quality, so factors other than the quality drive them to compare the differentiated products. For example, when we buy cold drinks; taste, style, flavor, price etc. decide our choice.
3. Mixed differentiation: This is the mixture of the 2 former scenarios. Products are differentiated in mixed manner of both vertical and horizontal differentiations in case of highly complex products.

Economics Concept Introduction

Introduction:

Product Differentiation or simply Differentiation refers to the system of the distinction of a product or service from others in order to make it more attractive and unique in the market. Differentiation is the key characteristic of the monopolistic market. Differentiated products help the firm or company to compete with the other popular and better products.