In the presence of horizontal product differentiation, there is a Essay - 1

In the presence of horizontal product differentiation, there is a tension between the desire to weaken price competition and the desire for increased market share - Essay Example A product has many dimensions and attributes such as technical and quality standards, design and service characteristics. An important distinction to be considered in product differentiation is horizontal and vertical differentiation. Vertical product differentiation is â€Å"where a firm’s product differs from its rival’s products in respect to quality† (Jobber, 2004, p. 145), whereas in horizontal product differentiation, the firm tends to differentiate its products in terms of features, while maintaining the same quality. The costs of products that are produced with horizontal differences do not vary to a great extent, as the production processes are similar for these products and hence it is common for these products to have the same price. However, this differs from the customer’s perspectives. The availability of a larger variety of products will increase the chances of the customer finding the product that closely meets his requirements and hence can increase his surplus. Moreover, horizontal product differentiation will enable the firms to sell its products to new customers, by meeting their needs and this will lead to the overall growth of the company (Johnson, Scholes and Whittington, 2006). Horizontal product differentiation has made it possible for a firm to produce different products of roughly the same quality with a difference in the list of features. This will lead to the production of new products with no increase in marginal costs. It is imperative to note that the presence of horizontal product differentiation has led to the conflict between the objective of weakening the price competition and the objective of increasing the market share. This is made clear by applying the spatial concept of Hotelling model to the concept of product differentiation (Hotelling, 1929). The price that a customer is willing to pay for a