Chapter 14 - Product Differentiation

Question 1

characteristics approach

Answer 1

instead of estimating the demand for each individual good, we estimate the demand for each characteristic of the goods

Question 2

hedonic prices

Answer 2

implicit prices of each characteristic, measured by regression

Question 3

not all consumers value each characteristic equally, utilities per characteristic vary per customer, signalled by their coefficient in a regression

Question 4

vertical product differentiation

Answer 4

corresponds to the case when consumers unanimously prefer more of a given characteristic

Question 5

horizontal product differentiation

Answer 5

refers to the case when different buyers’ preferences for a given characteristic have different signs, that is some think it’s a good thing, some think it’s a bad thing

Question 6

vertical product differentiation model

Answer 6

firms simultaneously set prices pi; consumers choose which product they want to buy from; and finally firms produce and supply the amount demanded, where each unit costs c to produce.
everyone agrees that a higher value of v implies a better product

Question 7

unlike the Bertrand case a small change in price does not imply a …

Answer 7

big change in demand

Question 8

aspects of the vertical product differentiation model

Answer 8

higher quality firms set higher prices
higher-valuation consumers purchase the higher-quality product
higher-valuation consumers are more sensitive to quality changes than lower valuation consumers

Question 9

direct effect

Answer 9

the direct effect of an increase in v1 (quality) corresponds to the change in π1 that takes place if prices remain constant at their initial equilibrium level

Question 10

strategic effect

Answer 10

corresponds to the effect of the equilibrium price adjustments following an increase in v1

Question 11

in the limit when v1=v2, we are back to…

Answer 11

Bertrand competition

firms set prices equal to marginal cost and earn zero profits

Question 12

The Hotelling model

Answer 12

customers' preferences are located by points on the same line segment. The same line is used to represent products (think of spatial product differentiation)
the timing (rules of the game) are similar to the Bertrand model. Firms simultaneously set prices pi; consumers choose which firm they want to buy from; and finally firms produce and supply the amount demanded, where each unit costs c to produce.

Question 13

the greater the degree of product differentiation, the … the degree of market power

Answer 13

greater

Question 14

If price competition is very intense, then firms tend to locate (1). If price competition is not very intense, then firms tend to locate (2).

Answer 14

1. far apart (high degree of differentiation)

2. close to each other (low degree of differentiation)

Question 15

strategic trade policy

Answer 15

when oligopoly competitors belong to different countries, import tariffs to foreign competitors may have the effect of increasing the domestic firm’s profits at the expense of the foreign firms

Question 16

search good

Answer 16

one whose features the consumer can ascertain before purchase

Question 17

experience good

Answer 17

one whose features can only be ascertained upon consumption

Question 18

informative advertising

Answer 18

describes the product’s existence, its characteristics

Question 19

persuasive advertising

Answer 19

is designed to change consumer’s perception about the product’s value

Question 20

branding

Answer 20

giving a meaning to specific organization, company, products or services by creating and shaping a brand in consumers’ minds.

Question 21

implicit contract between buyer and seller

Answer 21

if brand is associated with quality products, the implicit contract is that the brand offer high-quality products; and consumers, expecting to receive high-quality products, pay a high price for it

Question 22

umbrella branding

Answer 22

practice of selling several products under the same name

Question 23

the advertising to sales ratio is greater the greater the (1) of demand and the lower the (2) of demand (or the greater the price-cost margin)

Answer 23

1. advertising elasticity

2. price elasticity

Question 24

advertising that provides information about characteristics tends tos soften price competition

Answer 24

the moment consumers perceive the different products as different, firms no longer have the incentive to undercut their rivals

Question 25

advertising prices tend to intensify price competition

Question 26

search cost

Answer 26

Search costs include the opportunity cost of the time and effort spent on searching plus any explicit costs of money or scarce resources expended in searching

Question 27

price dispersion

Answer 27

situation whereby different firms set different prices for the same product

Question 28

obfuscation

Answer 28

sellers purposefully make selling terms unclear

may be interpreted as a seller strategy to increase search costs and thereby soften the degree of competition

Question 29

add-on pricing/shrouded attributes

Answer 29

features of a product or of the sales contract that are hidden from a consumer until after the purchase takes place

Question 30

switching cost

Answer 30

combination of objective and subjective, monetary and non-monetary barriers to change from one brand to another (example: switching from a windows laptop to a macbook)

Question 31

harvesting effect

Answer 31

due to switching costs, firms may increase prices without losing many of their current customers

Question 32

investment effect

Answer 32

when competing for new customers, the expectation of future rents from captive customers leads firms to price more aggressively

Question 33

when consumers are less than fully rational or perfectly informed, firms may have an opportunity to increase market power

Question 34

consumer protection

Answer 34

in many ways competition is the ultimate form of consumer protection, but imperfect information about each firm’s supply may lead to market power and, more generally, may result in consumer harm

Question 35

spurious product differentiation

Answer 35

identical products are perceived by consumers as different