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Class
Price
Crucial feature
Middle-low
Low
The cheapest nation-wide brand
Middle-high
Middle
The cheapest product of high quality
Notes
132
Two extreme classes should finally be added:
Class
Price
Crucial feature
Extremely low
Very Low
It usually does not work, it does not
last, and it has important defects
Extremely High
Very high
Exclusivity, non practical, status
symbol
In this way, you can vertically position different brands and product
versions, also using clues from advertising campaigns.
If you compare widely different goods fulfilling the same (highly-
relevant) need, you may distinguish at the extreme of your spectrum
necessity goods
and at the other
luxury goods
. In other cases, what makes
this difference is, instead, the nature of the need fulfilled.
As a general rule,
better products have a higher price
, both be-
cause of
higher production costs
(more noble materials, longer produc-
tion, more selective tests for throughput,...) and
bigger expected advan-
tages for clients
, partly reflected in
higher margins
.
Thus, the quality-price relationship is typically upwards sloped.
This means that consumers without their own opinion nor the capability
of directly judging quality may rely on the price to infer quality.
They will
prefer to pay a higher price because they expect quality to be better.
This important flaw in knowledge and information processing
capability - an instance of
bounded rationality
- can be purposefully
exploited by the seller, with the result that not all highly priced products
are of good quality.
Through this mechanism, the demand curve - that in the
neoclassical model - is always downward sloped, can instead turn out to
be in the opposite direction, with higher sales for versions having higher
prices.
Notes
133
(b) Horizontal Differentiation
When products are different according to features that can’t be
ordered in an objective way, a horizontal differentiation emerges in the
market.
Horizontal differentiation can be linked to differentiation in
colours (different colour version for the same good), in styles (e.g. modern
/ antique), in tastes.
A typical example is the ice-cream offered in different tastes.
Chocolate is not “better” than lemon.
This does not prevent specific consumers to have a stable preference
for one or the other version, since you should always distinguish what
belongs to the supply structure and what is due to consumers’ subjectivity.
Some consumers would prefer lemon to chocolate, others the opposite,
but this relates to them, not to the product line structure.
It is quite common that, in horizontal differentiation, the supplier
of many versions decide a unique price for all of them. Chocolate ice-
creams cost as much as lemon ones.
Another example of horizontal differentiation is represented by
films: each film is different from the others, while the price of entry to cinema
is always the same. This example shows that the internal organization of
the differentiation space can be structured around “genres” and several
similarity measures can be taken (e.g. two films having in common the
film-maker, an actor, etc.), without being linear and continuous (nor too
precise!).
When consumers don’t have strong stable preferences, a rule of
behaviour can be to change often the chosen good, looking for variety
itself. An example is when you go to a fast food and ask for what you
haven’t eaten the previous time. Fashion waves often emerge in
horizontally-differentiated markets with imitation behaviours among
consumers and specific styles going “in” and “out”. However, more in
general, horizontal differentiated versions may not be ordered along axes,
but merely juxtaposed.
Notes
134
(c) Mixed Differentiation
Certain complex markets are characterised both by horizontal
and vertical differentiation. For instance, apparel, garments and shoes
have an amazingly rich combination of shapes, colours, materials,
complementarities, seasonal and territorial specificities, appropriateness
to social events, relative distance to ideals promoted by media, stylists
and the showbusiness. The quality of the materials can often be seen as
a vertical differentiation but some other elements are clearly horizontal,
like shapes.
In such an environment, consumers can develop fairly different
styles of comparision, with some spending large amount of time getting
exposed and evaluating versions, talking with others and sharing judgments,
while others drastically reducing the difficulty of the comparision through
repurchase of very classical items.
(d) Determinants
How a product rates according to different measures of quality or
taste depends on both its
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