AP Economics Mr. Bernstein Module 68: Product Differentiation and Advertising December 9, 2014

AP Economics Mr. 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 2

AP Economics Mr. Bernstein Types of Differentiation Differentiation by Style Deep-dish, regular or cheesy crust pizza Consumers regard them as imperfect substitutes 3

AP Economics Mr. 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 4

AP Economics Mr. Bernstein Is Product Differentiation Efficient? Advertising can provide useful information and aid efficiency It can also waste resources and/or be misleading, reducing efficiency 5