Questioning Conventional Wisdom About Competition in Differentiated Markets

Managerial texts are full of conventional wisdom about competitive markets. Examples of such wisdom include the following ideas: (a) for success, differentiation is a strategic imperative, (b) the viability of a firm is seriously threatened when a competitor is significantly better at reaching and communicating with potential consumers and (c) premium pricing in a market with low levels of differentiation is often evidence of collusive behaviour. These ideas are based on analysis where consumers are assumed to have complete and accurate information about the important alternatives in a category. The objective of this paper is to demonstrate the fallibility of these ideas in a general context. The reality of most small-ticket consumer categories is that consumers are not fully informed about all the alternatives. This is because the majority of information for small-ticket purchases comes from advertising and not all potential consumers are exposed to advertising from every brand. By relaxing the simple assumption that consumers are fully informed, I show that the three ideas cited above are frequently incorrect. Copyright Springer Science + Business Media, Inc. 2005