Disadvantages of product differentiation , Managerial Economics

Disadvantages of product differentiation 

a) Product differentiation generally reduces the degree of competition in the market.  It does this in two ways:

         i.         It reduces competition amongst existing firms because consumers are reluctant to substitute one product for another, since they have developed brand loyalty.

          ii.        It makes it more difficult for new firms to enter the industry in the long run if the consumers are already loyal to existing products.

b)  All the effort and expense that the firms put into product differentiation are wasteful.  Too much is spent on packaging, advertising and design changes.  The price of goods could have been reduced instead.

c)  Too many brands on the market, produced by large number of firms, could prevent the realization of full economies of scale in the production of goods.

d)  Since the firms cannot expand their output to the level of minimum average cost output without making a loss, the "excess capacity theorem" predicts that industries marked by monopolistic competition will always tend to have excess capacity i.e. output is at less than capacity and price is above the average cost.

Posted Date: 11/28/2012 5:35:31 AM | Location : United States

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