0:08
Oh, welcome back.
We're going to talk about product differentiation, right?
Let's just give me a second to put myself together.
Product differentiation. We saw from the last two videos that one
way of getting out of the Bertrand trap, of the Bertrand paradox is to
differentiate your product. And differentiation very much depends on
consumer preferences. So, it's beneficial if consumer
preferences are heterogeneous, and only then.
If everyone would prefer the same, if everyone would like the same product, of
course it wouldn't make sense to offer anything different from the main product.
Okay? So, in what way can products be
differentiated? Well, plenty of dimensions, could be for
example, technical features. Cell phones have different form factors,
they have cameras, they have dictaphones and so on and so forth, these
are all technical features by which products may be different.
1:14
Durability. Some shoes just wear out very quickly,
some shoes you can wear forever. And that again, is a way of
differentiating your product. Resale value differs.
For example, if you look at flats, if you look at houses, then the resale value is
going to be very different for some houses or flats than for others.
1:39
Taste or image.
So, cars are very highly branded products, and that means that if you
buy a car, you buy into a certain brand, you buy into a certain image, and that's
going to be important. By location.
If there's a gas station that's right on your way home from work, then you're
much more likely to choose that one than to choose one that's on a street
next to you. Alright, or in a parallel street to that
one. Why?
Because it's simply more convenient to get there.
So, that makes the location another way by which products can be differentiated
or in that services can be differentiated.
2:18
Time also is a differentiating factor. When you buy a product, when you buy a
service, will also depend or will also give you different utilities depending on
what your preferences are. Right?
So, for flights, sometimes you just have to take the seven o' clock flight.
In that case, a ten o' clock flight is no good for you.
Some people will be happier with a ten
o'clock flight, and that means the seven o' clock wouldn't be a good
substitute for them. Now, when we talked about product
differentiation, we implicitly talked about two types of product
differentiation. Because products can be differentiated
along these two lines, that can either be horizontal differentiation or it can be
vertical differentiation. Now, what do these mean?
Now, that's an important one. Horizontal differentiation means that for
equal prices, some consumers would choose product A, whereas some consumers would
choose product B. Alright?
So, if the 7 and the 10 o'clock flight cost the same than some of them, some
people will just go for the 7 o'clock flight and some people will go for the 10
o'clock flight. Vertical differentiation is different.
Here, given equal prices, every consumer would choose product A over
product B. In other words, if you're on the 7
o'clock flight and there's a business class flight available at the same price
at the economy class, then everyone would choose the business class flight.
4:01
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.
5:45
Laptops. So, there's different brands, and some
people prefer the design of a Dell over the design of an HP.
And some prefer it exactly the other way around.
However, everyone agrees that if you get a faster CPU, you would go for that
laptop if you get the same price for it.
Okay? So, again, we've got elements of
vertical differentiation and we've got elements of horizontal
differentiation. So, by now, we've got some intuition on
what product differentiation is about. We're now able to distinguish horizontal
and vertical product differentiation. And in the next two videos, we'll have a
closer look at each of these two. For now, stay tuned and see you in a few
minutes.
Tobias KretschmerProfessor
