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Product Differentiation refers to the source

of competitive advantage that depends on
producing some item that is regarded to
have unique and valuable characteristics.

It is a concept in Economics and Marketing

proposed by Edward Chamberlin in his 1933
Theory of Monopolistic Competition.
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In marketing, product differentiation is the process of

distinguishing a product or offering 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 product offerings.

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.
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Consumer goods are available in a variety of styles

and brands. Product differentiation refers to such
variations within a product class that (some)
consumers view as imperfect substitutes.

FOR EXAMPLE-
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1. Horizontal Differentiation
2. Vertical Differentiation

HORIZONTAL DIFFERENTIATION:
 Consumers differ in their rankings of a group of
products, even if they were all priced identically.
 Differs in their preferences over productǯs
characteristics, like, color, taste, location of outlet.
 Products are said to be horizontally diffrentiated when
buyers à
 about which product is better.
 Example- Some people prefer Lays to Uncle chips, and
others prefer Uncle chips to Lays. The differentiation
between these products is horizontal.
VERTICAL DIFFERENTIATION:
 Products differ in quality which is equally perceived by
all people.
 So if all products have the same price, people would buy
the one with highest quality.
 Products are vertically differentiated when consumer
 about how to rank them.
 Example-
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Three Categories:
1) Product Attributes
 Exploiting the actual product
2) FirmȄCustomer Relationships
 Exploiting relationships with customers
3) Firm Linkages
 Exploiting relationships within the firm or
relationships with other firms
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  Product Features Ȃ the shape of a golf club
head
  Product Complexity Ȃ multiple functions
on a watch
  Timing of Introduction Ȃ being the first to
market
  Location Ȃ locating next to a freeway exit
    
 


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  Customization Ȃ creating a unique

diamond bracelet for a customer
  Consumer Marketing Ȃ creating brand
loyalty to a soap through image
advertising
  Reputation Ȃ sponsoring the local
homeless shelter to engender positive
community response
  

  Linkages among Functions in the Firm Ȃ using
a circuit board designed in one division in
other divisions
  Distribution Channels Ȃ a doughnut shop
begins to sell its doughnuts through gas
stations