142_11_oliveoil - Product differentiation Consumers view...

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Villas-Boas Lecture 11 eep142 Product differentiation •Consumers view some brands as closer substitutes than others •Brands are located (geographically) in the product’s characteristics space •The closer two products are (geographic or in characteristics space) the closer substitutes they •What does this mean for firms?
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Villas-Boas Lecture 11 eep142 Location models • Firms have some market power! • Firm’s profits (derived demand) are little affected by pricing strategies of other firms if consumers do not care very much about the other products • Consumers become less and less interested in brands that differ a lot from their favorite one
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Villas-Boas Lecture 11 eep142 Application: Ready-To-Eat Cereals Product differentiation as barrier to entry by four major U.S. cereal manufacturers (FTC did not win case) By creating a lot of “surrounding” cereal brands around a major brand, there may be not enough consumers left for another firm to enter Incumbent firms would create more than profit maximizing number of brands to prevent entry Segment popular in 1970s: health cereals – Since incumbent firms not located there, entry occurred - Eventually the incumbents entered this segment. But also given that this segment’s demand declined and all but one of new entrants exited
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Olive Oil Blind Tasting Experiment EEP 142, Spring 2011 Alisa Rudnick, Roni Hilel, and Sofia Villas-Boas
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Olive Oil Extra Virgin Certification American olive oil consumption has been growing No regulation of olive oil labels in the US Key law effective January 2009 in California requires that olive oil sold in the state must be labeled according to international olive oil standards. Several other states are on this same path, and federal regulation may not be far off. How might giving the coveted term “Extra Virgin” regulatory bite affect olive oil markets? (Gustafson and Lybbert, 2009). In the context of asymmetric information (we will go back to this case and above paper when we cover this in class later in the semester. Right now focus on product differentiation
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Olive Oil Definitions Virgin Olive Oil: obtained by mechanical and physical methods (particularly thermal) that do not alter the oil in any way (2 grams oleic acid per 100 grams of oil) Extra Virgin Olive Oil : created with a similar method as virgin olive oil, but less acidic (0.8 grams of oleic acid per 100 grams of oil) Olive Pomace: oil obtained by treating the pomace with solvents or other physical treatments; often mixed with other oils
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Where did this policy come from? State Senator Pat Wiggins (D-Santa
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This note was uploaded on 09/11/2011 for the course EEP 142 taught by Professor Villas-boas during the Spring '11 term at University of California, Berkeley.

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142_11_oliveoil - Product differentiation Consumers view...

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