Effectiveness of Product Differentiation - Research Paper Example

The success of the two companies can be attributed to successful product differentiation strategies that helped them to be different from their competitors. These companies didn’t have a monopoly rather the market structure was monopolistic. The basic products i.e. a magazine or women’s clothing offered by these two companies were already being offered by many companies. However these companies were able to command market power i.e. have a large market share and charge higher prices was because of the way they differentiated their product from its competitors (Taylor, 2006).

Product Differentiation can be regarded as a business strategy where companies try to look for different ways of offering their product compared to its competitors. Product Differentiation helps in gaining a competitive advantage if the product is able to form a perception in the customer’s mind that it is different and the customers have a preference for the differentiated product.Product Differentiation has to be communicated to the buyers through advertising, promotions, public relations, direct selling etc.

Ironically if a company is able to communicate and convince the buyers that a difference exists, it does not actually need to create a product that is different. For example, Nike does not differentiate itself based on the superior quality of its shoes. It differentiates itself by the way it formulates its marketing campaign which makes its buyers perceive it as a superior brand in that segment. Companies which are actually able to create a different product have to put in less effort to convince the buyers about the difference (AU School of Management, n.d.).

The report tries to study product differentiation from Business Economics point of view. It provides an insight into the importance of product differentiation under various market structures defined in economics.The report starts with a basic understanding of product differentiation and the types of product differentiation. The next section establishes the importance of product differentiation in economics.