Spatial Competition and
Product Differentiation
SPATIAL
COMPETITION
How to split the market between competing retailers, when consumers
will go to the closest vendor (i.e., convenience goods)?
Refer to Harold Hotelling, “Stability in Competition,” in this case, a duopoly, in which two vendors share
a linear market.
Illustrate this on the board, noting the assumptions of:
- Identical products
- A randomly distributed market
- Mobile vendors, who stay in one place long enough for
potential consumers to know their location.
Result:
vendors will split the market evenly as long as they’re equidistant
from the center, but the stable locations
are at the center of the market.
MARKET
TARGETING VIA LOCATION
However, most vendors will try to distinguish their offerings from
those of competitors, so that consumers will have more considerations
than proximity (in the case above) or price.
Identify what target market fits with one’s competitive strategy (on
what bases one distinguishes oneself from competitors) and locate to be
most attractive to that target market.
Why would a retailer select a particular target market? In
discussion, we emphasized:
- You can’t create synergy among the components of
marketing without an idea of the target market(s).
- You can have more impact in a targeted market.
- Targeting allows a more strategic use of
assets. I introduced strategic management:
using and investing in assets that have the greatest return in the
chosen environment.
MARKET TARGETING
VIA PRODUCT DIFFERENTIATION
- Draw a basic supply-demand graph.
- Explain why the supply curve slopes upward, despite
the usual presence of scale economies: we’re looking at the
righthand-side portion of a short-run supply curve, when fixed assets
such as facility size are constant.
- Point out the consumers’ surplus and producer’s surplus.
If a producer or vendor can segment the market, offering similar
products at different prices to different groups of buyers, the
producer or vendor can appropriate more of what would have been the
consumers’ surplus. How? Through product differentiation, such as:
- Chevrolet/Buick/Cadillac
- First class/ business class/ coach or economy class
- Similar products with different labels
- Different product mixes in different retail outlets,
presented differently and with different levels of service, at
different price points.
Product
differentiation may be defined as the creation of buyers’
preference for one product over another for which it could be
substituted. In the extreme case, a vendor would be able to sell
the exact same product to different buyers at different prices;
this is called price discrimination.
A producer or vendor can focus on differentiating its product or
service from those of competitors, and/or
on differentiating products or services that it offers to targeted
markets.
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