Economics of Strategy: Rivalry

Economics of Strategy: Rivalry

‘In neoclassical theory, product differentiation provides consumers with a variety of different products within a particular industry… In reality, firms do not differentiate their products to make them different, or to give consumers variety, but to make them better, so consumers would rather buy that firm’s product rather than the product of a competitor.’  Randall G. Holcombe (2009). Compare and contrast the competing views expressed here.  

             Today’s everchanging business environment requires companies to continuously adopt suitable strategies to stay ahead of competition. Among these, product differentiation has received considerable research attention in the academic literature. The main purpose of the assignment is to discuss and compare the two opposing views presented in the given citation concerning product differentiation. The paper will mainly focus on analysing the key neoclassical theory concept which states that the product differentiation aims to provide consumers with a wide range of products within the given industry. Furthermore, this aspect will be counterargued by the opposing reality scenario in which it is noted that the companies do not differentiate the products in order to enable variety and differentiation, but rather to make themselves better, aiming to shift the consumers preference towards buying their products instead of procuring them from a competitor.

              In this context, the neoclassical theory tends to differentiate the competitiveness of the firms from the monopolies structure and assumes that the market structure is exogeneous. However, in the real-world business realm, companies tend to take actions to produce market power for themselves, by employing effective strategies and finding various means which will enable the manufacturers to differentiate the products with the sole goal of gaining higher market shares and profits (Baye, 1997).

             As per the neoclassical theory, product differentiation is considered as a key strategy of an organisation which will enable the company to be more competitive over their rivals in the dynamic market conditions. The availability of homogeneous products triggers competition among companies while their efforts seek minimising their costs. As per the theory, if a company works towards differentiating their products, which is more desirable to the consumers, it will result in the loss of consumers, revenues and profits of other competitive companies in the market. However, if the competitors also adopt these changes in their products it will lead to generating normal profits only (Thomas, 2012). Moreover, the theory of the firm implies that the companies tend to increase their profits as their main objectives. The profit maximising strategy is underpinned by the product differentiation, and sale of high volume of those products (Thomas, 2012).