What is product differentiation?
3 important questions on What is product differentiation?
What is product differentiation in business strategy?
Product differentiation is a strategy used by firms to achieve a competitive advantage by:
- Increasing perceived value of products/services
- Comparing to competitors' offerings
- Enabling higher pricing and revenue generation
- Focusing on customer perception
How do firms create product differentiation?
Firms create product differentiation by:
- Altering the objective properties of the product
- Enhancing features that add value
- Ensuring differences align with consumer preferences
- Recognizing it is ultimately based on customer perception
How does product differentiation affect a firm's profits?
- Differentiated products allow firms to set prices above average total costs.
- Focal firm achieves above normal profits.
- Demand (D) for differentiated products is higher, allowing price (P) to exceed marginal cost (MC) and average total cost (ATC).
- No differentiation results in price equal to minimum average total cost, allowing only normal profits.
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