Answer to Question #132421 in Microeconomics for Neba

Question

Does product differentiation have any implications on the demand for the product of a firm and its market power?

Answer 1

Product differentiation is a marketing strategy in which a firm distinguishes its products from those of competitors. It has strong implications on demand and market power.

Through product differentiation, a firm creates and communicates a sense of value and superior quality in its brands. This differentiation results in the brand creating its own market and demand. When the differentiation strategy is successful, the brand becomes a better choice to consumers and hence high demand. Consequently, the firm enjoys a monopoly power, faces a downward sloping and inelastic demand curve, and becomes a price setter. Examples of globally trending, strong brands include Samsung products, iphone products, Toyota Lexus vehicles, Ferrari vehicles, and computer brands like Dell XPS 15, HP Specter x360, Lenovo, and many more.

Thus, product differentiation creates market and demand, and results in market power where a firm will have full control over its products, for example, in determining prices.