Horizontal Differentiation in the Uk Coffe-Shop Market Essay

1653 Words Apr 5th, 2013 7 Pages
Horizontal Differentiation in the UK Coffee Shop Market
“In the presence of horizontal product differentiation, there is a tension between the desire to weaken price competition and the desire for increased market share.” Explain this statement. Critically evaluate its implications for corporate decision-making regarding the specification of products by analysing, in the context of real-world industry of your choice, the product specification chosen to serve the same market by each of two or more industry rivals.

Coffeehouses first came popular in the UK in the mid-17th century with the first ones being established in Oxford in 1650. In the mid-1990s Seattle-based coffee shop conglomerate Starbucks successfully entered the UK market,
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It is believed that under the general market conditions, the lower the product price is, the larger its market share becomes. However, the presence of horizontal product differentiation assumes that consumers’ preferences are uniformly distributed; therefore they won’t necessarily prefer the least expensive good, moreover, the bigger the product differentiation is, the more it will dilute any relevance of price. Hence, product differentiation grants each firm a degree of monopoly power over those consumers that favour the firm’s product design. The bigger the market share, the lower the importance to consumers of product differentiation becomes. It can be held that when the market share effect dominates the market power effect, there would be minimal differentiation. In converse situation, where market power effect dominates the market share effect, there would be maximal differentiation (Church & Ware, 2000).
“The top 12 branded coffee shop chains had 3,041 outlets in the UK and the Republic of Ireland in 2011. In total, there were 14,022 coffee shops in the UK in the same year, which means that the branded coffee shops accounted for 21.7% of the total market in 2011. This figure is likely to rise further in the future, as larger firms gain market share and dominance at the expense of smaller chains and independents. The first and second stores, Costa and

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