Product Differentiation vs. Price Discrimination: What’s the Difference?

Product Differentiation vs. Price Discrimination: An Overview

Product differentiation and price discrimination are two strategies used in marketing and economics. Product differentiation is the process used to distinguish one company’s goods and services from another company’s goods and services.

Conversely, price discrimination is a strategy used to distinguish prices for the same goods and services.

Key Takeaways

• Product differentiation and price discrimination are two different approaches to marketing used by a variety of corporations.
• Product differentiation lets firms set their products apart from competitors. The three types of differentiation are horizontal, vertical, and simple.
• Price discrimination markets the same products at different prices, based on age, financial need, or geographic region.

Product Differentiation

Product differentiation seeks to distinguish a product from a competing product to make it more attractive to a specific target market. Three types of product differentiation are horizontal, vertical, and simple.

Horizontal product differentiation distinguishes a product based on one characteristic of the product; however, consumers are not able to distinguish which product has a higher quality.

Vertical product differentiation is also based on one characteristic of a product, but consumers are able to distinguish which product has a higher quality. Simple product differentiation is based on distinguishing a product on many characteristics.

For example, a company can differentiate its product by packaging it better. Suppose a soda company packages its soda in a new ergonomic bottle, while another soda company packages its soda in a plain aluminum can. There is very little differentiation in the soda itself, but the products are differentiated by the containers.

Note

While product differentiation is used across the board, price discrimination tends to be more common in certain industries, such as travel, pharmaceuticals, textbooks, food and beverage, and entertainment.

Price Discrimination

Price discrimination occurs when the same goods and services are sold at different prices from the same company. Unlike product differentiation, price discrimination focuses on charging different customers different prices for the same goods. Contrary to product differentiation, price discrimination does not focus on distinguishing its product from others.

For example, a company that offers a student discount is considered price discrimination. Generally, students may not have the money to buy products and are more sensitive to price changes, so businesses try to attract more of that target market by making items cheaper.

Another example might be a hotel chain that charges one rate in New York and another in Portland, for the same size room and same accommodations. Still, another would be an airline that sells two seats across the aisle from each other, but one is $50 less because it was discounted the week before the flight.

Ethics and Legality

The use of product and price discrimination by businesses must be considered within ethical and legal frameworks. Price discrimination may be considered unethical by consumers who pay more than others for the same good or service without a clear reason. This could erode trust and loyalty in a company, potentially damaging a company’s reputation.

From a legal standpoint, companies need to ensure they comply with antitrust laws created to promote fair competition. The Robinson-Patman Act prohibits price discrimination and other anti-competitive strategies. Violating these laws can lead to penalties and damaging relationships with stakeholders.

What Is an Example of Product Differentiation?

An example of product differentiation would be a coffee shop selling organic, fair-trade coffee, with special flavor blends and environmentally conscious packaging, setting itself apart from standard coffee companies. This highlights features such as sustainability, quality, and exclusivity. This would appeal to customers who care about those factors in the coffee they drink.

What Is an Example of Price Discrimination?

An example of price discrimination is airline ticket pricing. Airlines charge different prices for the same class on the same flight based on factors like time of purchase, and whether the traveler is booking one-way or round-trip. For instance, people who book tickets far in advance often pay less than those who book last minute for the same type of seat.

Is Price Discrimination Illegal?

Price discrimination is not always illegal. Businesses can charge different prices based on factors like customer location or quantity purchased. Under laws like the Robinson-Patman Act, price discrimination could be illegal if it harms competition.

The Bottom Line

Product and price discrimination are two different strategies that businesses use to attract customers. Product differentiation entails setting products apart through factors such as quality, unique features, or presentation.

Price discrimination adjusts the price of goods and services based on customer segments or circumstances. Both methods can be effective but come with ethical and legal considerations that businesses must consider.