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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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