Used cars are horizontally differentiated.
So, if we take a car that's run 40,000 kilometers so far, there may be a red
version, there may be a silver version and there may be a black version.
And some people are just going to go and buy the red one, some people are going to
buy the black one. Okay?
So, we've got these different dimensions, this one dimension of horizontal
differentiation which in this case is color. But at the same time, we can also
consider this as vertical product differentiation if we have three red
cars. One that ran 60,000 kilometers, one that
ran 40,000 kilometers, and one with 20,000.
Then if these were to cost the same, then everyone would buy the one for 20,000,
because it's a better product. Okay?
So, horizontal differentiation is red, vertical differentiation is basically
like a quality ladder. And plenty of products will have both
dimensions here. So, take flights, we've used that example
already, but it's still interesting to look at.
So, these different flights are horizontally differentiated, because
people will have different preferences. Economy, business and first class are
vertically differentiated products,
because here, everyone, if there was a flight available on first class for the
same price as a business class flight, everyone would go for first class.
What's important with vertical differentiation is the willingness to pay
for a better product. And that's going to mean that possibly
the market is going to split.