MarketingProduct differentiation is another strategy for market dominance. R and D may aim at the development of distinctive product varieties. Advertising and another sales effort can be used to cultivate a favorable brand image among final consumers and distributors. The resulting brand loyalty can create a dominant position because it raises entry costs for rivals who will have to either overcome or duplicate the brand loyalty in order to compete successful.

For consumer goods industries, vertical integration from manufacturing to wholesales and retail distribution facilities product differentiation, if only because it promotes the flow of information from consumers of producers. A firm that controls access to final consumers is in a strong position with respect to rivals, especially if that access cannot be duplicated without some sunk investment and some passage of time.

The policy questions raised by product differentiation as a competitive strategy are complex. R and D can create new and more satisfactory products, and advertising can give consumers information that will improve market performance. But these strategies will require costly expenditures and will have the additional effect of increasing market power for the firm that uses them successfully. As we will see in chapter 8, firms with market power are likely to invest too much, from a social point of view, in product differentiation.