PRODUCT DIFFERENTIATION AND MARKET PERFORMANCE IN PRODUCER GOODS INDUSTRIES (STRUCTURE, INDUSTRIAL ORGANIZATION, COMPETITION, STRATEGY, INDUSTRIAL)

The relationship between product differentiation strategies and industry profitability is examined for producer goods. Previous studies considered advertising as the product differentiation variable and focused largely on samples of consumer goods industries. This research defines product differentiation as consisting of physical, service, and image differentiation. Two additional variables, distribution (selling expenses other than media advertising) and product R&D (R&D expenses devoted to improving the product) are introduced to measure physical and service differentiation, respectively. The type of services responsible for product differentiation is expected to depend on the extent of buyer search for information prior to purchase. Producer goods industries are classified according to the search expected in their purchase and hypotheses are developed linking product differentiation and profitability for each of these categories. The structure-conduct-performance paradigm of industrial organization economics is utilized to build the model for the empirical analysis. The results suggest that for postponement industries, search is high, and product differentiation is based on services provided by manufacturers. If postponement industries also ship to personal consumption, product differentiation is also based on advertising. For direct speculation industries, search appears to be medium, and manufacturers do not appear to be responsible for product differentiation; direct supply appears to be prompted by cost-efficiency considerations. Mixed and indirect speculation industries do not indicate product differentiation by manufacturers and it is thought possible that merchant wholesalers provide intermediate services in these low search industries. These results change during business slumps when price shading appears to take place in postponement industries, but not in speculation industries.