Product differentiation in economic markets Social Sciences Coursework (Coursework Sample)

Product Differentiation and Economic Progress
Research Objectives
In Holcombre’s article, he aims to analyze and discuss product differentiation as a positive point of view in enhancing social welfare together with generating progress in contrast of the neoclassical economic view on imperfect/monopolistic competition. He argues that product differentiation is essential for all firms because it improves the quality of products offered to consumers, lowers the cost of production, and generates economic progress.
Methods for data collection and data analysis
Holcombre used comparative analysis between neoclassical theories, Austrian economic literature on monopolistic behavior of firms towards product differentiation and Joseph Schumpeter’s views. This gave way to his main argument that product differentiation is in fact a substantial aspect of monopolistic competition in relation to increasing economic growth and the welfare of the society.
Results and Findings
Holcombe discussed first the neoclassical economic view on monopolistic competition toward product differentiation and profit maximization. He said that it only provided consumers with a variety of products within a particular industry rather than a homogenous product that characterizes perfectly competitive markets (Holcombe, 2009 p.17). This enhances economic welfare towards consumers but it offsets the additional average cost for the firm due to product differentiation. Hence, it is only beneficial for the consumers and not the firm.
He wanted to say that product differentiation is the key for a firm to gain more profits and improve the welfare of the consumers. He started by pointing out that in the neoclassical theory of the firm, managers are the one who run the firm, and the goal of the manager is to maximize profits by finding the optimal combination of inputs and producing the optimal quantity of output (ibid., p.19). In this neoclassical theory, competitive firms in the long run have maximized their profit if it is zero. But why would managers want to gain zero profit in the long run if they can gain more by differentiating their product? He quoted authors of economic books such as Besanko ,Breautigam and Perloff, and articulated that there is an inconsistency with textbooks about maximizing profit in the neoclassical view that products should be homogenous. Comparing reality and what the textbooks that he mentioned, firms that gain profits are those who differentiate their product and in this way, they gain monopoly power which in turn enable firms to gain more profit to increase capital. He said that in the real world the people who run firms can decide to purchase different inputs and to produce different outputs. They can decide to adopt different production processes (ibid., p.21). This is what he said is the process of innovation. Through gaining more profit, firms can develop new and different products. His view on product differentiation is in contrast with the neoclassical economic point of view, because in this view differentiation of products will only increase the cost of production. He then says,