Product Differentiation

Question 1

What is product differentiation? State its basis?

Answer 1

1. In some industries the buyers regard certain products as identical to one another, such as basic farm crops.
2. While other industries have products differentiated in some way or another.
3. This differentiation is based on -
   • advertising
   • brand names
   • distinctive designs
   with barely to do with its tangible differences.

Question 2

What is the degree of product differentiation?

Answer 2

1.The degree of product differentiation is associated with the strength of buyer’s preferences.
2. It varies from slight to fairly large & tends to becoming greatest among infrequently purchased goods or “prestige goods” such as gifts.

Question 3

What are entry barriers?

Answer 3

The entry barriers are the advantages that the existing sellers of an industry have established over the other potential entrants.

Question 4

How can the entry barriers be measured?

Answer 4

The entry barriers are measured by the extent to which the established sellers keep on persistently raising the selling prices above the minimal average costs without attracting new sellers.

Question 5

How Come these barriers exist within the industry?

Answer 5

These barriers exist within the industry on the very fact that
1. the costs for established sellers are lower than what it would be for the new entrants.
2. Established sellers can command higher prices from customers who prefer their products over the potential entrants.
3. Moreover, it is required that these new entrants are able in commanding a substantial share of the market before operating with Profitability.

Question 6

What are the three barriers according to their degree of difficulty imposed on new entrants in entering the industry?

Answer 6

1. Blockaded - this level of difficulty or blockaded entry is a barrier when the established sellers set their monopolistic prices according to their whips and fancies , without attracting new entrants.
2. Impeded entry - This barrier is imposed by the established sellers by raising the prices above the minimal average costs but it is not as high as the monopolistic prices, without attracting the new entrants.
3. Ease entry - This does not permit the established sellers to raise prices above the minimal average costs at all without attracting the new entrants.

Question 7

What is called barriers to entry?

Answer 7

The barriers to entry are the hurdles which the oligopolies and the monopolies impose to maintaing their dominance and position through increased costs.

Question 8

What does an incumbent do to raise barriers to entry?

Answer 8

The incumbent that is the oligopolies and the monopolies either
• erect these barriers deliberately, or
• exploit the existing natural barriers.

Question 9

What are the two types of entry barriers?

Answer 9

1. Natural
2. Artificial

Question 10

What are the natural barriers to entry?

Answer 10

1. Economies of large scale production -
   • if the market has large economies of scale exploited by the incumbents, new entrants are deterred.
2. Ownership or control of key scarce resources creates a considerable barrier to entry such as the airline controlling access to an airport.
3. High set-up costs -
   • increase the break-even output
   • delay the possibility of making profits
   • many of the costs are “sunk costs”
4. High R&D costs -
   • found in oligopolistic markets such as pharmaceuticals and chemical industry.

Question 11

What are sunk costs?

Answer 11

•Costs that cannot be recovered even after the firm leaves the market
• these costs are the
>advertising
> marketing
> other fixed costs

Question 12

What are the artificial barriers?

Answer 12

1.Predatory pricing
2. Limit Pricing
3. Superior Knowledge
4. Predatory acquisitions
5. Advertising
6. Strong brand
7. Exclusive Contracts, patents and licenses
8. Vertical integration

Question 13

Wat is predatory pricing?

Answer 13

When the incumbents deliberately lower down the prices to push out the rivals from the market.

Question 14

What is limit pricing?

Answer 14

When the incumbents set the price lower than the Average Total Costs of the potential entrants and raise the level of output , then it becomes difficult for the potential entrants to make profits.

Question 15

What is superior knowledge?

Answer 15

The superior knowledge refers to the overtime knowledge of the incumbent developed with respect to production costs,customer and market.

Question 16

What is predatory acquisition?

Answer 16

The acquiring of the sufficient shares of the potential entrants to gain a controlling interest or the complete buying of the firm by the incumbent.

Question 17

What does CMA do?

Answer 17

The CMA or the Competition and Markets Authority prevents Predatory Acquisition to help competition thrive.

Question 18

What is advertising?

Answer 18

Advertising is the sunk cost - the more spending it involves from the incumbents the more difficult is it for the entry of the potential entrants.

Question 19

Why is a strong brand an artificial barrier?

Answer 19

A strong brand is an artificial barrier as it creates
• loyalty
• “locks in” Existing Customers
•deters entry

Question 20

Explain how exclusive contracts , patents and licenses help detering entry?

Answer 20

If there has been a contract between an incumbent retailer and the supplier then this will deter the other retailers from entering the market. Therefore, its favourable for the incumbents to win contracta and own licenses.

Question 21

How are the incumbents helped with “loyalty schemes” ?

Answer 21

Schemes such as Tesco’s Club Card helps oligopolist retain customer loyalty, deter new entrants.

Question 22

What is Vertical Integration?

Answer 22

Vertical integration is about tie-up of the supply chain, for example;
• Sony having its own retail outlets that is Sony Centers.
• Brewer like Heineken has its own chain of UK pubs acquired from the brewers Scottish and New Castle in 2008.