Product differentiation

[1] Firms have different resource endowments that enable them to construct specific competitive advantages over competitors.

[2] Resource endowments allow firms to be different, which reduces competition and makes it possible to reach new segments of the market.

Thus, differentiation is the process of distinguishing the differences of a product or offering from others, to make it more attractive to a particular target market.

Differentiation makes customers in a given segment have a lower sensitivity to other features (non-price) of the product.

[6] Edward Chamberlin’s (1933) seminal work on monopolistic competition mentioned the theory of differentiation, which maintained that for available products within the same industry, customers may have different preferences.

However, IO literature (Ethiraj & Zhu, 2008; Makadok, 2010, 2011) did deeper analysis into the theory and explored a clear distinction between the wide use of vertical and horizontal differentiation.

[9] Horizontal differentiation seeks to affect an individual's subjective decision-making, that is the difference cannot be measured in an objective way.

Firms operating in a market of low product differentiation might not coordinate with others, which increases the incentive to cheat the collusion agreement.

If a firm slightly lowers there prices, they can capture a large fraction of the market and obtain short term profits if the products are highly substitutable.

From the producers perspective building a different product compared to competitors can create a competitive advantage which can result in higher profits.

Through differentiation consumers gain greater value from a product, however this leads to increased demand and market segmentation which can cause anti-competitive effects on price.

[13] From this perspective greater diversity leads to more choices which means each individual can purchase a product better suited to themselves, the negative to this is prices within the market segment tend to rise.

For example within grocery stores, If a category of goods is relatively nondifferentiated then a high amount of assortment depth leads to less sales.

On the one hand, introducing remote access steals depositors from your competitor because the product specification becomes more appealing (direct effect).

For low and high values of the ratio quality difference to transportation rate, only one bank offers remote access (specialization).

Intermediate (very low) values of the ratio quality difference to transportation costs yield universal (no) remote access.

First, the bank gains a positive market share for all types of remote access, giving rise to horizontal dominance.