Monday, April 11, 2011

Product Differentiation in Apparel Markets

The New York Times has an interesting article about how retailers, such as Walmart and JC Penney, are signing up for textile "green score", which is a measure of how eco-friendly the garment was produced. In economic terms, this is an example of product differentiation. If consumers view on apparel item the same as another, then prices tend to converge towards a market competitive price and those producers who are less efficient (have higher marginal or average total costs) will make lower profits than those who are more efficient. If some of those efficiency gains occur because of environmental degradation then the price may not reflect all the costs of production (i.e. a negative externality occurs).

One possible market solution is to differentiate the product (or service) so that customers can take into account the differences between the variety of sellers. Here we have such a response. Retailers can show (via the green score) that some textile items are produced in a more environmentally friendly way, and for those customers who value purchasing products that are produced that way, will be willing to pay a higher price for essentially the same product. This is the basic idea of product differentiation and how we end up with markets that have very similar or identical products, but different prices.

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