AP Economics

Mr. Bernstein

Module 68: Product Differentiation and Advertising

December 2015

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AP EconomicsMr. Bernstein

Product Differentiation• Attempts by firm to convince consumers their

product is different from competing products• By making them different:

– 4-wheel drive vs. 2-wheel drive

• Or just by convincing consumers they are different!• Either way, firms can charge a higher

price if they can differentiate– Bleach is bleach

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AP EconomicsMr. Bernstein

Types of Differentiation• Differentiation by Style• Deep-dish, regular or cheesy crust pizza• Consumers regard them as imperfect substitutes

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AP EconomicsMr. Bernstein

Types of Differentiation• Differentiation by Location• Common in service industries such as groceries, gas

• Differentiation by Quality• BMW vs. Hyundai; consumers

often pay a higher price even if difference is only perceived

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AP EconomicsMr. Bernstein

Is Product Differentiation Efficient?• Advertising can provide useful information and aid

efficiency• It can also waste resources and/or be misleading,

reducing efficiency