Discuss about the Economics Solutions for Product Differentiation.
Product differentiation is the general marketing of products by creating minor variations from other products which are used by customers while making a choice. In economics or marketing, product differentiation is utilized in distinguishing a specific product from another which may be functionally same, but the differentiation helps in attracting customers which helps the firm gain economic profits. As a product becomes more attractive to the customers, if product differentiation is done effectively it can generate competitive advantage for the product because it becomes finer or unique in the eyes of the customers (Varian, 2010).
Product differentiation can be of various types starting from just making changes in the styling or packaging of the product, to making changes in prices because of lower costs or changes in functional features of the product. The basic objective of such differentiation is to change the perspective of the customer towards a particular product compared to another product. There are generally three types of product differentiation namely: Simple, Horizontal and Vertical. Simple product differentiation is based on different characteristics. Horizontal and Vertical are opposites in nature where horizontal product differentiation is based on one single feature but the consumer cannot differentiate the product with higher quality whereas in case of vertical, it is also differentiation on the basis son one feature but the consumer can differentiate.
Product differentiation arises from various sources. The main sources are:
When the non-functional features of a product are highlighted in contrast to another product even though there functional features are same then that kind of a differentiation is called non-functional in nature. This can be done by bringing styling changes of the product, or its color, or with very unique advertising.
Sometimes lower cost in the production of one product with the same functions of another helps the producer in offering a lower selling price which acts as a lower cost or pricing differentiation
Differences based on location or time which creates a differentiation in availability of he product (Boundless Economics)
When buyers overlook essential features or quality of the product it also creates a sort of differentiation
Product differentiation also helps in creating brand loyalty towards a particular brand which is preferred particularly by customers because of its unique design or outlook. If a firm is successful in making the consumer highly desire the product then the demand for the product rises which helps the consumer sell at a higher price and hence brings in economic profits for the consumer.
A good example for product differentiation can be the market for mobile phones like the differentiation strategies adopted by Apple to differentiate its very famous i-phone from other phones. Apple uses various product differentiation strategies to differentiate i-phone from other mobile phones. Such strategies involve both functional as well as non-functional and is very much evident that they have been successful in changing the perspective of consumers towards i-phone making it more attractive and highly demanded which in turn allows Apple to charge higher prices. Apple uses all kinds of non-pricing strategies through advertising, marketing, unique design, functional features being unique, etc. Apple being an imperfective competitive firm has been successful in creating competitive advantage (Hanks, 2016). It is very much common to ask that such imperfective firms can easily charge a lower price and take over the market but it wouldn’t do something like that because it involves the decrease in profits due to lower revenues.
How product differentiation help is through affecting the demand curve of the market. A firm gains some sort of pricing power in the market. With differentiation the firm makes the product more preferred by the customers and hence with price changes customers become less likely to divert away from the product thus making the demand curve more inelastic in nature. With inelastic demand curve the price rises at the same quantity making the firm earn more profits.
As we see in the figure below for a firm in an imperfective competition the profit maximizing output is attained at price=marginal cost or P=MC. Hence, in part (a) of the figure we see that the demand curve is elastic. Profit maximizing output is Q’ as there P=MC and ATC which is the average total cost is below the average revenue curve which brings the firm economic profits (Pindyck et al, 2009). Now in the part (b) of the figure we see that the demand curve becomes steeper implying it becomes inelastic which raises the price further bringing the firm more profits at the same quantity of Q’. The red shaded region the diagrams show the profit earned by the firm.
Conclusion:
Hence we see how product differentiation helps big firms attract more customers and gain profits in future. By making minuscule functional or non-functional features in styling, packaging or design of products, producer can make customers desire the product more, increasing the demand for product, making the demand curve inelastic and increasing the price which further increases the profits.
Introduction:
Wages are monetary compensations or the remuneration that the employer pays the employee on getting a job done. It can be some sort of gross or annual pay or including bonuses, commissions but excluding shift differentials or profit payments.
Wages across individuals or occupations differ a lot. These wage differentials can be within the same industry whereas also can exist across the industries. It is comparatively easy for us to apply our common sense to realize that different occupations do have different wages as all individuals do not possess the same set of skills and credentials and labor demand and supply acts as a crucial component in fixing different wages of different occupations (Piana, 2001). But if we consider difference in wages of individuals within the same industry then economics concepts do not completely justify the phenomenon. This happens because when such wage differentials are considered then one has to distinguish two workers based on various other criteria which do not relate to economic concepts completely. Wages between two workers in the same occupation can be due to a number of reasons staring from the skill sets of each worker, their innate abilities, working conditions, geographical regions as well as human capital acquisition (Sowell, 2010).
The top 5 cause of wage differentials are:
Occupational differences: In this case occupations in an organization are very much different from each other based on skill requirements, period of employment requirements and extent of responsibility. Differences within occupations boost and challenge people to work harder to attain greater higher paying occupations by developing through high level education or training. For example the salary of a manager is higher than that of the junior officers or assistants because the manager has attained higher degree of education experience. Jobs with high skilled labor have more inelastic demand and supply curves compared to jobs with lower skilled labor (Sikder, 2006). This happens because high skilled laborers helps in bringing more profit for the organization and have high qualifications whereas low skilled workers do not have high qualification are many in number and with low marginal revenue product as they may not bring higher profits for the firm (Spaulding, 2016). As we see below the demand and supply curves of higher skilled and low skilled workers with the former receiving higher wages than the latter.
Inter-firm differentials: In the same area or occupation there can be wage differences in between different plants, etc. These differences are based on the quality of labor, labor market imperfections and equipment efficiency differences along with technological advancement, financial capability, size and age of firm, managerial efficiency, raw material availability, etc.
Regional differences: Wages also differ between workers of the same occupation but different geographical areas. This happens because differences in working conditions, that are prevalent based on the different regions.
Inter-industry differences: Workers of same occupation, same region but of different industries also face wage differentials. These wage differences occur because of the differences in skill requirements, nature of the product market, level of unionization, etc.
Personal wage differences: Workers of same occupation can have difference in wages because of the difference in the personal characteristics of the workers. As reported by Elka Torpey in a report that in May 2014 the top earning 10% of athletes and sports competitors earned more than $187200 cutoff whereas the lowest earning 10% of athletes were seen to have annual wages even less than $20190 which is even sufficiently less than the median wage of $35540 for all in the occupations (Torpey, 2015).
These differences are based on the innate abilities or skill sets of the workers which the worker may naturally possess or had gained expertise in being more efficient than the other workers.
Compensating wage differentials: When jobs in the same industry differ as one asks for more risk taking or working for longer hours which pays the worker more than the one which does not have such requirements. This is in form of compensation to the worker.
We know demand supply mechanisms in the labor market may give rise to occupational wage differentials as for certain occupation the demand may be much higher leading to higher prices whereas for some it may be lower leading to higher wages. The demand for labor is a derived demand in the sense that its demand is derived from the demand of the good or service the worker has expert skills in (Mankiw, 2007).
We saw the types of wage differentials above and we see that there are many reasons which give rise to wage differentials and these maybe beyond the scope of economics. These reasons are:
Qualifications or credentials: Individuals with higher educational degrees earn more than the ones not possessing such credentials.
Experience: A worker’s experience is a crucial determinant of his wage. No wonder a senior analyst with much more experience is paid much higher than a junior analyst with not that much of experience (Lipsey at al, 2011)
Specific job responsibilities: Jobs with more complex tasks are paid higher than the ones which are comparatively simpler. These tasks imposes greater responsibility on the worker and simultaneously demand expert skills from the worker hence paying him more
Trade unionization: As trade unions collectively possess a bargaining power they can negotiate with employers to earn higher wages. (Economics Online)
Success and Performance: A person who is more efficient, had been performing well with a good track record and had been successful to get a job in a particular industry which has very small supply of such high skilled workers can easily earn much higher than others.
Revenue creation: Workers more productive and the ones who can earn higher revenues for the firm are paid higher by the organization
Discrimination: Employer discrimination also can be included in this list as discrimations between genders by organizations and industries had been an influencing factor to create wage differentials between men and women of the same occupation (Riley, 2016)
Human capital acquisition: employers also reward workers who devote in acquisitation of higher educational degrees or trainings which may be part time or full time (Samuelson et al, 2010).
Conclusion:
Hence we saw, that how various factors create the different types of wage differentials. If we focus on the rationale behind wage differentials we find that there are two views. Firstly, we consider the socialistic patterns of the society and government here plays the role of minimizing inequalities in incomes as well as wealth distribution so that the society as a whole develops boosting the economic growth through the channels of higher quality human capital and getting more jobs done with increase in aggregate demand and income. Secondly, wage differentials get their justification through the wide demand supply mismatches in the labor market. The differences here are based on skill requirements, ability, knowledge, aptitude, experience and also the derived demand of the particular labor. Another justification given in support of wage differentials is the full natural resources exploitation (Chand, 2016).
References:
Lipsey, R & Chrystal, A 2011, Economics, Oxford, New Delhi
Sowell, T 2010, Basic economics, Basic books, USA
Mankiw, G 2003, Macroeconomics, Worth publishers, New York
Sikdar, S 2006, Principles of macroeconomics, Oxford, New Delhi
Pindyck, R, Rubinfeld, D & Mehta, P 2009, Microeconomics, Pearson, South Asia
Boundless Economics, 2016, Product differentiation, viewed 31 August 2016, https://www.boundless.com/economics/textbooks/boundless-economics-textbook/monopolistic-competition-12/monopolistic-competition-75/product-differentiation-281-12378/
Riley, G, 2016, Labor market-wage differentials, viewed 31 August 2016, https://www.tutor2u.net/economics/reference/labour-market-wage-differentials
Spaulding, W, 2016, Wage differentials, viewed 31 August 2016, https://thismatter.com/economics/wage-differentials.htm
Economics Online, 2016, Labor Market, viewed 31 August 2016, https://www.economicsonline.co.uk/Competitive_markets/The_labour_market.html
Piana, V, 2001, Wages, viewed 31 August 2016, https://www.economicswebinstitute.org/glossary/wages.htm
Torpey, E, 2015, Same occupation Different pay: How wages vary, viewed 31 August, 2016, https://www.bls.gov/careeroutlook/2015/article/wage-differences.htm
Samuelson, P& Nordhaus, W 2010, Economics, Tata McGraw Hill, New Delhi
Mankiw, G 2007, Economics: principles and applications, Cengage learning, New Delhi
Hanks, G, 2016, Apple Pricing strategy, viewed 1 August 2016, https://www.ehow.com/way_5815745_apple-differentiation-strategy.html
Chand, S, 2016, Top 5 causes of wage differentials, viewed 1 August 2016, https://www.yourarticlelibrary.com/hrm/jobs/top-5-causes-of-wage-differentials-explained/35339/
Varian, H 2010, Intermediate microeconomics, Affiliated East-West Press, New Delhi
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