KRUGMAN'S

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Product Differentiation and Advertising

• KRUGMAN'S
• MICROECONOMICS for AP

Margaret Ray and David Anderson
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What you will learnin this Module
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What you will learnin this Module

• How and why oligopolists and monopolistic
  competitors differentiate their products.
• The economic significance of advertising and
  brand names.

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Product Differentiation

• Product differentiation is the attempt by firms
  to convince buyers that their products are
  different from those of other firms in the
  industry.

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Differentiation by Style or Type

• As long as consumers have different tastes,
  producers will be able to increase profits by
  differentiating their products to suit those
  tastes.

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Differentiation by Location

• Many monopolistically competitive firms
  differentiate their product by location
  particularly in service industries

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Differentiation by Quality

• Even if quality differences are mostly
  perceived, consumers are often willing to pay a
  higher price for a product they perceive to be of
  higher quality.

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Is Product Differentiation Efficient?

• Product differentiation can increase product
  variety and advertising can provide useful
  information, both of which can benefit consumers.
• Product differentiation can be a waste of
  resources and advertising can mislead consumers,
  both of which can be an inefficient use of
  resources.