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Comparing Portuguese and U.S. labor markets.

Differentiated Products

A firm can try to make its products different from those of its competitors in several ways: physical aspects of the product, selling location, intangible aspects of the product, and perceptions of the product. Products that are distinctive in one of these four ways are called differentiated products.

Physical aspects of a product include all the phrases you hear in advertisements: such as an unbreakable bottle, nonstick surface, freezer-to-microwave, non-shrink, extra spicy, newly redesigned for your comfort. The location of a firm can also create a difference between producers. For example, a gas station located at a busy intersection can probably sell more gas than one located on a small side-road. A supplier to an automobile manufacturer may find that it is advantageous to locate near the car factory.

Intangible aspects can differentiate a product, too. Some intangible aspects may be promises like a guarantee of satisfaction or money back, a reputation for high-quality services like free delivery, or a loan to purchase the product. Finally, product perception may occur in the minds of the buyers. For example, many people could not tell the difference in taste between common varieties of beer or cigarettes if they were blindfolded, but because of past habits and advertising, they have strong preferences for certain brands. Advertising can play a role in shaping these intangible preferences.

The concept of differentiated products is closely related to the degree of variety that is available. If everyone in the economy wore only blue jeans, ate only white bread, and drank only tap water, then the markets for clothing, food, and drink would be much closer to perfectly competitive. The variety of styles, flavors, locations, and characteristics creates product differentiation and monopolistic competition.