Features of Horizontal Product Differentiation - Essay Example

In today’s world, within the corporate structure, non-price competition has occupied a place of enormous importance. To survive in any industry, the corporate houses are increasing realizing the importance of more and more innovation regarding the products they offer to the consumer. Price competition has no longer been the most important aspect to be considered while making any particular strategy foe extending market share under fierce competition from old as well as newer entrants. One form of non-price competition that the firms have been relying on to a large extent is product differentiation. Product differentiation can be defined as a marketing process of the firms within an industry, through which varieties in the products that the firms offer are introduced. Through the process of product differentiation, a particular firm distinguishes its product from that of other firms by intruding certain unique feature in its product. Another thing to be considered here is that product differentiation not only involves differentiating one’s one particular product from the products of the competitors, but also from ones’ own product ranges. If product differentiation by a firm for any particular type of product becomes successful, then it is said to give the firm a competitive advantage to a large extent over other firms. This happens for the reason that once product differentiation is introduced, buyers start to view the differentiated products as superior a unique than other products. Product differentiation can be visualized as a process which over times helps in improving the quality of commodities or services that any firm offers to its customers through innovations. Introduction of new goods in the market space with completely new features within it shows some kind of radical change which in turn lead to change in share of market as well as industry structure. (Hotelling, 1929) Product differentiation can be of two types – vertical product differentiation and horizontal product differentiation. Before coming to horizontal product differentiation, it’s important to provide some idea about vertical product differentiation so that it becomes much easier to understand horizontal product differentiation. In a market space where there are a number of goods that can be ordered according to their quality. They are ranked from the highest to the lowest according to their quality. It is therefore very easy to say in this case that one particular good is better than the others. Horizontal differentiation, on the other hand, refers to a different type of product differentiation observable in the market. Very often it can be found that products are different according to the characteristics that are impossible to be ordered. In this case, it is said that horizontal product differentiation has been emerged in the market. A very common example of horizontal price differentiation is that of an ice-cream firm that offers ice-cream of several tastes and flavours. In this case it can’t be said than ice-cream of one particular taste is better than the other. For example, it can’t be said that in terms of quality lemon ice-cream is better than the chocolate ice-cream. However, different consumers have different tastes and hence one would like the chocolate ice-cream, while consumer would like the lemon ice-cream. (Sharp and Dawes, 2001) Horizontal product differentiation can be defined as differentiation in terms of some characteristics of product, for example in terms of colours, in terms of styling, or in terms of tastes, etc. It can be found in the market that curtains of identical qualities are available at different colours. Similarly, having been made with same quality material, there could a wide variety of shirts for male with different styling. These are all practical examples of horizontal product differentiation in product markets. It is not necessary under horizontal product differentiation that one particular firm will make product with one particular style, one particular colour, or one particular taste. A single firm can introduce horizontal product differentiation for its own product so as to cater to consumers of different tastes and preferences. Another important feature of horizontal product differentiation is that although it provides a wide varieties of one particular product with identical qualities, it does not pose any restrained on any particular consumer to pursue his or her own stable preference for one particular version of any product. This is because of the reason that under horizontal product differentiation one can always distinguish what are there within the supply structure of a particular product as well as what is the consumer’s subjectivity. Very often, under horizontal product differentiation, the supplier of a specific product who offers different versions of it, charges a unique price for all the versions of the product he sells. For example an ice-cream company charges the chocolate ice-cream as much as he charges for the lemon strawberry ice-cream. Similarly, a firm that makes curtains of different colours decides a unique price for all the colours he sells. Economic theories suggest that successful product differentiation leads to formation of a particular market structure known to be as monopolistic competition. Therefore, the corporate houses that operate in the presence of horizontal product differentiation become monopolistically competitive firm which have to face limited amount of competition on the basis of price from the other firms operating in the same market. These monopolistically competitive firms posses certain amount of monopoly powers. Under horizontal product differentiation, it is impossible for perfect competition to exist as the prime condition for perfect competition is the presence of perfectly substitute products in the market. Under monopolistic competition each firm obtain a particular share of market. If the product differentiation is horizontal in nature, then to increase market share the firm has to innovate a number of new varieties in terms of taste, colour, styling or some other differentiating factors. (Chamberlin, 1933) Horizontal product differentiation has an advantage to improve the performance of a corporate house producing a particular product by reducing the degree competition, particularly in case of price competition. Through the process of product differentiation as the product becomes more and more different, the method of categorization of the product seems to be much more difficult and therefore, it’s capable of drawing lesser comparisons from its competitors. Economic theories of product differentiation suggests that if a product differentiation is successful then it will be able to move its product from price based competition to competition on the basis of non-price factors like characteristics of the product, promotional activities, strategies for distribution, etc. this holds true for all kind of product differentiation, and therefore to horizontal product differentiation also. One very well known theory of price determination under horizontal product differentiation is the location model. (Sharp and Dawes, 2001) Determination of price under horizontal product differentiation can be presented as follows: To show the determination of price, under a theoretical set up, the most convenient way is to consider the case of a two firms. Suppose there are two corporate house selling similar but slightly differentiated products. Also suppose that here differentiation comes in terms of the location of the firm in the market place. Suppose two firms are situated at two different places. And also suppose that the consumer is situated somewhere in between the two firm. Lets assume that total difference between the two firm is 1 and the distance of firm 1 from the consumer is x. the cost of unit traveling is t. therefore, consumer at place x buys from firm1, iff p1 + tx < p2 + t (1 - x) Consumer/Buyer at place x is indifferent between the two firms, iff p1 + tx = p2 + t (1 - x) Hence, 2tx = t – p1 +p2. Corporate 1 sells q1 units and corporate 2 sells q2 units. Corporate one’s profit can be given by (p1 q1 – c q1 ), c is the per unit cost of production. The profit equation can be given by ∏= (t + p2 – 2tx) q1 – c q1 Profit maximization condition of firm 1 can be given by (t + p2 – 2tx) = c. Similarly profit maximization condition for firm 2 can be obtained. (Perloff and Salop, 1985; Anderson, et al. 1992) Now the important thing to be noted here is that here market share of the firms do not depend on the price level, but on the location of the firm, mainly. Therefore, here, product is differentiated through location. In the presence of horizontal product differentiation every firm faces two important issues that they have to deal with. As theory predicts, horizontal product differentiation softens the level of price competition. To increase market share, reducing one’s price does not seem to be an efficient method. Because consumers here show some kind of stable preference for some particular variety of any specific product and price here does not matter much. Here consumers are not so much concerned about whether some firm is giving any price discount. The simple reason is that every firm offers differentiated products. Under horizontal product differentiation, a corporate house can survive in the market only through innovation of different varieties of goods. As mentioned earlier, under horizontal product differentiation, a firm try to offer different varieties of one particular product on the basis of some specific characteristics, such as color, styling, tastes. Under this type of product differentiation, consumers are not attracted by offering the promises of proving high quality product than the other firms producing the similar product. But, here the efficient strategy of attracting consumers in order to increase market share would be to offer newer ranges of product so as to fit to the need and demand of larger consumer base. (Kotler and Keller, 2006) In the presence of horizontal product differentiation, corporate houses have to make marketing strategy focusing on what kind of services the company can provide to its customer in respect of a specific product. Along with it, any particular corporate house has to promote its product not by illustrating its quality, but by announcing what new varieties of any specific product have been introduced. In today’s world, which is moving at a very fast pace, people do not wait for anything these days. Under such a scenario, to fulfill the desire of enhancing market share, a corporate house has to deliver its goods and services when they are actually needed. Very often, this implies that the corporate firm has to be made itself faster than its competitors to reach to larger consumers. Apart from this it also has to innovate new ranges of products by efficient and careful analyzing of the exact need of the consumers. For example a corporate house that manufactures curtain, has to resort not to price competition, or quality enhancing of products, but to create some new colours, new designs that are still not existing in the market, according to the ongoing consumer preferences as well as tradition choices what different consumers want. Hence, a lot of new consumers can be attracted. So, the market share should increase for the particular corporate and hence it is advantageous among its rival corporates also. If this specific corporate reaches a large pool of consumers without affecting the equilibrium price set up in the market, automatically they can increase their market share. So, the decision making should be prompt and accurate for succeeding to minimize the tension between weakening price competition with increased market share. (Kotler and Keller, 2006; Sharp and Dawes, 2001) References 1. Anderson, S. P., Palma, A. and Thisse, J.F. 1992. Discrete Choice Theory of Product Differentiation. Cambridge, Mass: MIT Press. 2. Chamberlin, E. 1933. The Theory of Monopolistic Competition. Cambridge: Harvard University Press. 3. Hotelling, H. 1929. Stability in Competition. Economic Journal, 39:41-57. 4. Kotler, P. and Keller, K.L. 2006. Marketing Management (12 ed.). New Jersey: Prentice Hall. 5. Sharp, B. and Dawes, J. 2001.What is Differentiation and How Does it Work? Journal of Marketing Management, 17:739-59. 6. Perloff J.M. and Salop S.C. 1985. Equilibrium with Product Differentiation. Review of economic studies, 52: 107-120. Read More