Module 33 krugman 1
Module 33
Product Differentiation and Advertising
What’s New in the Fourth Edition?
• Updated business cases
Module Objectives
• What is the purpose of production differentiation?
• What are the various ways in which products can be differentiated?
• Why do firms advertise and create brand names?
Teaching Tips
How Firms Differentiate their Products
Creating Student Interest
• Ask students to consider the market for toothpaste (or some other market with considerable product
differentiation). What is the purpose and function of toothpaste? (To clean your teeth.) Ask students
Presenting the Material
• Have students identify both the costs and benefits of product differentiation in the athletic shoe
market. Have them consider the athletic shoes sold at discount stores versus name-brand athletic
Controversies About Product Differentiation
Creating Student Interest
• Ask students to think of three recent purchases. To what extent did advertising or brand names
influence their decision? What was it about the advertising that influenced them? Why do some
consumers say that they are not influenced by advertising?
• Use Handout 33-2 to discuss advertising in the various market types.
• Ask students how much they think a domain name on the web is worth to a business. For example,
how much is a website such as www.lasvegas.com worth?
• Ask students whether the quality of a Nike athletic shoe is really superior to that of a store brand
purchased at Walmart or whether Air Jordans are better than a regular Nike athletic shoe.
• Ask students if they think they can tell the difference in taste between Sam’s Club cola and Coca–
Cola.
Module 33 krugman 2
Presenting the Material
• Make sure students understand that the goal of advertising is to increase profit. Through advertising,
firms are attempting to differentiate their product, and make demand for their product more inelastic.
If successful, advertising will shift the firm demand curve to the right. Monopoly firms have an
incentive to advertise because they also want to shift the demand curve for their product to the right.
Perfectly competitive firms can advertise as a group in order to shift the demand curve for their
product. Individual firms in a perfectly competitive market have no incentive to advertise because
they sell a homogeneous good.
• Use the following table to provoke a discussion about the value of a brand name.
The World’s 10 Most Valuable Brands 2011
Rank
Brand
2011
brand value (US$ in billions)
1
Apple
153.285
2
Google
111.498
Module Outline
I. How Firms Differentiate Their Products
A. Product differentiation plays a crucial role in monopolistic competition; it is the only way firms
can gain market power.
1. Firms differentiate their products by:
a. style or type
b. location
c. quality
II. Controversies About Product Differentiation
A. The role of advertising
1. Advertising is only worthwhile in industries in which firms have some market power.
2. Advertising that provides product information has economic usefulness.
3
IBM
100.849
4
81.016
5
78.243
6
73.752
7
69.916
8
67.522
9
57.326
10
50.318
Module 33 krugman 3
3. Advertising influences consumers even when the ad provides little information.
a. Consumers may not be as rational as economists assert.
b. Ads can “signal” consumers about the availability and quality of a product.
4. Is advertising a waste of resources?
a. If ads only work by manipulating the weak-minded, they are an economic waste.
b. To the extent that advertising conveys important information, it is economically
productive.
B. Brand names
1. Consumers often pay more for brand-name products than identical and cheaper store–
brand items.
2. Brand names can convey information on product quality and reliability.
Case Studies in the Text
Economics in Action
The Perfume Industry: Leading Consumers by the Nose—This EIA explains why profit in the perfume
industry remains high instead of being driven to zero as new firms enter the industry.
Ask students the following questions: