If a new farmer enters the wheat industry, the full range of products that
the farmer can produce is already in existence. In contrast, if a new firm
enters the smartphone or tablet industry, that firm must decide on the
characteristics of the new products it is to design and sell. It will not
produce smartphones identical to those already in production. Rather, it
will develop variations on existing products or even a product with a
whole new capability. Each of these will have its own distinctive
characteristics, including colour, size, shape, screen quality, video
capability, and so on. As a result, firms in the smartphone and tablet
industries sell an array of differentiated products, no two of which are
identical.
The term differentiated product refers to a group of products similar
enough to be called the same product but dissimilar enough that they can
be sold at different prices. For example, although one brand of shampoo
is similar to most others, shampoos differ from each other in chemical
composition, colour, smell, brand name, packaging, and reputation. All
shampoos taken together can be regarded as one differentiated product.
Most firms in imperfectly competitive markets sell differentiated products. In such industries,
the firm itself must choose its product’s characteristics.Firms Set Their Prices
Whenever different firms’ products are not identical, each firm must
decide on a price to set. For example, a single price is not established for
cars or TVs or jeans by equating overall demand with overall supply.