horizontal differentiation while 7 would correspond to the degree of vertical differentiation. For example, a line of cars that has more features at the high end than at the low end is differentiated vertically, while a line of cars that come with different types of features, such as standard versus automatic transmissions, is … Horizontally differentiated products vary only marginally, as it's more efficient for producers to try to capture as many new consumers as possible with minimal additional costs. If the price of product A is stable, a small increase in the price of product B will also result in a large decrease in the demand for product A. For small companies, this can be great. What is it that makes one product ‘better’ than their competitors? As a result, this group will pay more to buy product B rather than buy product A. As has been well-established in the marketing literature, Horizontal differentiation seeks to affect an individuals subjective decision making, that is the difference cannot be measured in an objective way. Examples of Horizontal product differentiation: Consider a beach. Companies introduce various levels of quality for a particular product to appeal to a wider audience. If horizontal differentiation is weak, demand for product A is sensitive to a price change for product A or product B. Companies that market horizontally differentiated products have demand curves – graphs that relate price to quantify demanded -- that slope downward. Examples include Coca Cola vs. Pepsi or Pampers vs. Huggies. In the digital camera example above, the weight of the camera is a sought-after feature that justifies a price difference, while the camera color might not. The greater the perceived difference, the higher the probability that brand loyalty will develop, which affects a company's competitive position and market share. MINI plays up it’s fun and quirky perception to appeal to stylish people. For example, different color … Products A and B are horizontally differentiated because neither group considers one brand of chips to be a good substitute for the other. During her career, she has published business and technology-based articles and texts. Why Is the Demand Curve Also a Willingness to Pay Curve? There are two broad categories of differentiation -- vertical and horizontal. It also gives them a better chance to compete against more popular products. Horizontal branding is when a company differentiates its product as “different” and subjectively more appealing to some people. Unlike horizontal differentiation, vertical differentiation is more concerned with the quality of the product. © 2019 www.azcentral.com. Therefore, a seller attempts to distinguish its product from that of another company hoping some customers will purchase the product because it is more appealing than competing products. The Differentiation Horizontal node is designed to take a list of Features, along with an optional list of Variations, and quantify the Horizontal Differentiation between each. Economics of Strategy; David Besanko, et al. Tore Nilssen – Horizontal product differentiation – Slide 2 Two kinds of product differentiation (i) Horizontal differentiation: Consumers differ in their preferences over the product’s characteristics. This is not to be confused with a value propositionwhich communicates your overarching promise. Therefore, these consumers will buy product A even if the chips are sold at a higher price than product B. A classic example of investment in horizontal product differentiation is provided by the much-studied rivalry between Coca-Cola and Pepsi, which has been estimated using a Bertrand specification in Gasmi et al. The perfectly homogeneous case arises when 6 = 0 and 3. EXAMPLE: 1: Horizontal Differentiation: Pepsi vs Coca Cola, bottled water brands, types of Face wash. 2: Vertical Differentiation: Branded products vs. generics: 3: Mixed Differentiation: Vehicles with same price points from two different manufacturers. For example, variations in the design, size, fabric or color of a dress constitute horizontal differentiation. Horizontal differentiation often is cheaper than improving quality, which is necessary for vertical differentiation. What is Vertical Differentiation. Product differentiation is the business strategy of developing and marketing different kinds or styles of products. For example, when a company that sells good products expands to start selling kitchenware, it will supplyto the same customers in th… Unlike vertically differentiated products, the features of horizontally differentiated products cannot be ordered objectively. Also, assume that consumer group C does not consider product B to be a good substitute for product A. The choice is purely subjective and often contained within the brand’s product line. What Is the Relationship Between Elasticity & Marginal Utility? Oftentimes, customers assess those types of products by personal preferences. Instead, consumers must select a product for purchase in part based on the comparison of the merits of one product versus another. Small business owners usually are fully aware of product differentiation, even if not by that name. Named, of course, after their two inventors, or the people that first analyzed it. In each extreme of the beach, there is an ice-cream post. Horizontal Differentiation – specified equivalent rates, some buyers would decide on product “A”, whereas other people would pick product “B”. A combination agency will take two separate but related services and provide them both to … The Difference in a Product & a Product Concept, Microeconomics; David Besanko and Ronald Braeutigam. So why does one (Coca-Cola) consistently out-sell the other? We find evidence of the predicted vertical differentiation, as well as clear evidence of horizontal agglomeration among the high quality firms, and horizontal differentiation among the low quality firms. When differentiating a product from others, it does not necessarily have to be completely different or new. And we had products that are different in taste, or image, or location. In either case, the company is looking to meet the needs of more consumers by offering them different products. Remember, vertical product differentiation, and that's what we're going to focus on now, horizontal product differentiation. This is called the market related to concentric diversification. What Is a Demand Curve That Is Downward Sloping? Add new products to the existing products in similar markets that will serve similar customers through the same distribution system. The intense competition between Coca-Cola and Pepsi, who are the largest producers of carbonated drinks in India, will make a good example to understand how they differentiate their offerings in India. Gap or Gucci jeans. These strategies are not mutually exclusive. This model is tested using approximately 100,000 transactions from the Public Finance investment banking industry from 1986-1999. For example, your product line could have various flavors, colors and styles. A manufacturer offers a particular mix of product attributes to create a brand that appeals to certain customers. 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