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

  1. Draw a basic supply-demand graph.
  2. 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.
  3. 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.


Copyright James W. Harrington, Jr.
revised 9 April 2010