S2 - product differentiation Flashcards
what is product differentiation
characteristics of a product
Real or perceived
Property of consumer preferences - diversity and tastes are heterogenous
Key element of non price competition
Can increase monopoly power by reducing cross price elasticity
If perceived to be unique —> become price inelastic
Reducing price can reduce sales
Firms demand curves can become interdependent
what is horizontal PD
optimal choice at a particular price depends on a particular consumer
No goods or bads and similarly prices products can always find a particular niche in the market
what is Lancaster’s characteristic approach
focus is not on goods themselves but their characteristics
each product is a bundle of characteristics
Proportion of these vary across products
Consumers have a finite budget
Analysis looks at efficiency frontier (budget constraint) and product space
Points inside the frontier are inefficient
Being neighbours can affect competition
what is hoteling
linear city
Straight line bounded at each end
Customers are uniformly distributed along the city
Geographical location differentiates suppliers
P = PC + T
Production cost plus transport cost
what is circular city
consumers uniformly distributed
No end points
Firms aim to locate as far away as possible from rivals
Optimal distance between each = 1/N
As t increases, there is a need for more firms
Optimal number involves a trade off between set up costs and savings to consumer from lower transport costs
Can pre empt possible entry
what is vertical PD
one product is superior to another
Can’t sell different qualities at same price
Very high quality may not compete on price - consumers may only want to buy if expensive
Utility = u(t-p)
Consumers partition themselves by income - fragmentation of markets
Asymetric information - vendor knows more about quality than buyer
Misuse can generate negative externalities
All prices fall
Market failure
solve by branding and methods of quality assurance to install consumer confidence
buyers are assumed to communicate with each other
Cheating firm is unable to sell at P1
