Bertrand paradox.
a model prediction in which two firms in the same market reach a Nash equilibrium where both firms charge a price equal to marginal cost. If either firm were to lower its price it would gain the whole market and substantially larger profits. Since both companies know this, they will each try to undercut their competitor until the products are selling at zero profits. There paradox is that firms usually make positive profits in reality.
Differentiation is beneficial if consumer preferences are heterogeneous.
* Technical features.
* Durability
* Resale value
* Taste/Image
* Location
Horizontal differentiation/ Vertical differentiation. (Color/Mileage)
* Given equal prices, some consumers would choose product A whereas others would choose product B.
* Given equal prices, every consumer would choose product A over product B.
(i3, i5, i7 cpus <-> OEM makeer; economy, business, first class seats)
HORIZONTAL DIFFERENTIATION
Hotelling Bertrand model. Highly relevant for analysing product differentiation.
* Three generic strategies for creating a defendable position and outperforming competitors in an industry.
* These required different organisational arrangements, control procedures, incentive systems and resources.
Cost – Leadership
* Low-cost relative to competitors as strategic main theme
* Central elements of the strategy
* Efficient-scale facilities
* Rigorous cost reductions from experience.
* Avoidance of marginal customer accounts.
Differentiation
* Differentiating the product or service, offering something that is perceived industry-wide as being unique
* Exemplary forms of differentiation
* Design or brand image
* Technology
* Customer service
* Differentiation along multiple dimensions
Focus
* Focus on particular buyer group, segment of the product line or geographic market.
* Central rationale: Serving narrow strategic target group more effectively or efficiently than competitors.
* Lower costs or more differentiation with regard to single niche.
Stuck in the middle.
Firms that fail to develop their strategy in at least one of the three directions are in poor strategic position
* Firms lack the market share, capital investment, and resolve to “play the low-cost game”.
* Firms lack industry-wide differentiation to obviate the need for a lost cost position.
* Firms lack focus to create differentiation or low-cost position.
Ambidexterity
* Stuck in the middle does not mean that firms cannot pursue multiple strategies simultaneously.
* The pursuit of hybrid/ambidextrous strategies might lead to better results that following pure strategies.
* But tensions within organization need to be managed.
