Singh_Econ139A_S2011_Lec12

Singh_Econ139A_S2011_Lec12 - Product Differentiation,...

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1 business. technology. society. Product Differentiation, Pricing, Advertising The Economics of Electronic Commerce (Economics 139A) UCSC Spring 2011 Professor Nirvikar Singh April 22, 2011
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What is a Product? If the uses or characteristics are sufficiently similar, the products are “differentiated” but not “different” Operating systems, word processing packages, Internet services, and Web portals are each a different product or service, but within each group there are differentiated products or services available If the differences are large enough, the distinction is obvious: software and cereal are different products
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Degrees of Differentiation How much differentiation? Standardized Customized Maximum Minimum or Personalized
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Types of Differentiation Horizontal product differentiation One version is not unanimously considered to be better than another, but rather the ranking of products depends on the subjective tastes of the customer Vertical product differentiation Users are unanimous in their ranking of products or services based on the gross value (neglecting price paid)
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Product Differentiation Strategy May involve differentiation with respect to competitors’ products, as well as differentiation in product offerings to one’s own customers 1. Creates greater value for customers, and greater potential revenue for businesses, by fulfilling their wants more precisely 1. Reduces substitutability with rivals’ products, and softens price competition 1. Creates market power and supports price discrimination, which allows more effective capture of the value created by differentiation 1. Multiple versions of a product by same firm occupy more of the product “space”, increasing potential market share and profits
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Price Discrimination The ideal for a profit-maximizing business is to charge the maximum a customer is willing to pay for what is offered (value capture) 1. If different customers have different valuations, then they would be charged different prices 2. If a customer is willing to pay more for the first unit and less for the second unit of a good, a business would price the units differently This kind of differential pricing, not based on cost differences or differences in the product or service, is price discrimination
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... and Market Structure Only monopolists get to price their products and services in isolation In general, businesses have to consider not only what their customers are willing to pay, but also how their competitors are pricing In the extreme case of perfect competition, price discrimination is not possible, and prices will be uniform
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…and Resale Customers may buy and resell the product (arbitrage) Harder to do with time-dependent services, such as air trips, though some of that difficulty is created by the sellers A price discrimination strategy may include ways of preventing such resale Digital goods such as music and news can be sold cheaply, quickly and at different prices to individual
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Singh_Econ139A_S2011_Lec12 - Product Differentiation,...

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