Product differentiation
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Product differentiation means making a product look different from rivals' products through its brand, quality, design, packaging or service. Because buyers see it as special, the firm gets some control over its price, even when there are many sellers and entry is free. This is the defining feature of monopolistic competition. Advertising and branding build buyer loyalty, which makes demand less sensitive to price.
Example
Dozens of companies sell soap and shampoo in India, but a loyal customer of one brand will not switch just because another brand is a few rupees cheaper. That loyalty lets the brand charge a little more.
Don't confuse with
- Barriers to entry: these stop new firms from entering at all, through things like patents, licences or huge fixed costs. With differentiation, new brands can still enter freely.
- Homogeneous product: an identical product sold by all sellers, such as wheat in a mandi. No seller can charge more than the others.
Related concepts
- Market structure
- Market power
- Barriers to entry
- Market concentration
- Herfindahl-Hirschman Index
- Concentration ratio
- Price maker