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The Mechanism behind Product Differentiation: An Economic Model

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  • Harashima, Taiji

Abstract

The strategy of product differentiation has been viewed as very important in the field of business administration, but it has not necessarily been viewed as an important source of large differences in firms’ profits in the field of economics. In this paper, this apparent contradiction is examined based on the concepts of “ranking preference and value.” In the proposed model, if a product’s implicit rank is higher, households will purchase the product far more often than competing products even if their qualities are almost identical and the tastes of households are uniformly distributed. Even a slight difference in quality can result in a clear difference in implicit ranks and consequently large differences in firms’ profits. Therefore, the effects of differentiation are amplified by ranking preference, and product differentiation efforts are truly very important for firms.

Suggested Citation

  • Harashima, Taiji, 2017. "The Mechanism behind Product Differentiation: An Economic Model," MPRA Paper 81522, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:81522
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    Cited by:

    1. Harashima, Taiji, 2019. "Why Is Executive Compensation So High? A Model of Executive Compensation," MPRA Paper 91326, University Library of Munich, Germany.
    2. Harashima, Taiji, 2018. "Superstars in Team Sports: An Economic Model," MPRA Paper 86360, University Library of Munich, Germany.

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    More about this item

    Keywords

    Product differentiation; Ranking preference; Ranking value; Monopoly power: Monopoly profits; Marketing strategy;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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