Product Differentiation vs. Price Discrimination: An Overview

Product differentiation and price discrimination are two strategies used in marketing and economics. Product differentiation is the process used to distinguish one company's goods and services from another company's goods and services.

Conversely, price discrimination is a strategy used to distinguish prices for the same goods and services.

Key Takeaways

  • Product differentiation and price discrimination are two different approaches to marketing used by a variety of corporations.
  • Product differentiation lets firms set their products apart from competitors. The three types of differentiation are horizontal, vertical, and simple.
  • Price discrimination markets the same products at different prices, based on age, financial need, or geographic region.

Product Differentiation

Product differentiation seeks to distinguish a product from a competing product to make it more attractive to a specific target market. Three types of product differentiation are horizontal, vertical, and simple.

Horizontal product differentiation distinguishes a product based on one characteristic of the product; however, consumers are not able to distinguish which product has a higher quality.

Vertical product differentiation is also based on one characteristic of a product, but consumers are able to distinguish which product has a higher quality. Simple product differentiation is based on distinguishing a product on a numerous amount of characteristics.

For example, a company can differentiate its product by packaging it better. Suppose a soda company packages its soda in a new ergonomic bottle, while another soda company packages its soda in a plain aluminum can. There is very little differentiation in the soda itself, but the products are differentiated by the containers.

While product differentiation is used across the board, price discrimination tends to be more common in certain industries, such as travel, pharmaceuticals, textbooks, food and beverage, and entertainment.

Price Discrimination

Price discrimination occurs when the same goods and services are sold at different prices from the same company. Unlike product differentiation, price discrimination focuses on charging different customers different prices for the same goods. Contrary to product differentiation, price discrimination does not focus on distinguishing its product from others.

For example, a company that offers a student discount is considered price discrimination. Generally, students may not have the money to buy products and are more sensitive to price changes, so businesses try to attract more of that target market by making items cheaper.

Another example might be a hotel chain that charges one rate in New York and another in Portland, for the same size room and same accommodations. Still another would be an airline that sells two seats across the aisle from each other, but one is $50 less because it was discounted the week before the flight. (For related reading, see "Three Degrees of Price Discrimination")