In economics and marketing, product differentiation (or simply differentiation) is the process of distinguishing a product or service from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own products. The concept was proposed by Edward Chamberlin in his 1933 Theory of Monopolistic Competition.
In economics,
successful product differentiation leads to monopolistic competition and is
inconsistent with the conditions for perfect competition, which include the
requirement that the products of competing firms should be perfect
substitutes. There are three types of product differentiation: 1.
Simple: based on a variety of characteristics 2. Horizontal : based on a
single characteristic but consumers are not clear on quality 3. Vertical :
based on a single characteristic and consumers are clear on its quality.
The major sources of product
differentiation are as follows.
- Differences in quality which are usually accompanied by
differences in price
- Differences in
functional features or design
- Ignorance
of buyers regarding the essential characteristics and qualities of goods
they are purchasing
- Sales promotion activities of sellers and, in
particular, advertising