Essay II: Spatial Product Differentiation


The degree of product differentiation of a market is diagnostic of the similarity or dissimilarity of products. It indicates whether products are substitutable or differentiated and therefore constitutes a useful measure of a market’s competitive intensity. The substitutability of products appears to be an appropriate measure of product differentiation. However, its operationalization proves rather complex, especially when it comes to the comparison of product differentiation over time or across markets.

In the present paper, I discuss and develop measures of product differentiation in a multidimensional characteristics space (or in a Hotelling-type market). After specifying the requirements a measure of product differentiation should satisfy, I investigate a number of avenues to measure product differentiation. Interestingly, I am able to illustrate that popular distance measurement functions such as the sum of Euclidean distances or the sum of City Block distances contradict basic notions of product differentiation and therefore contradict the above requirements. Further, I discuss the potential of Weitzman’s measure of diversity to validly measure product differentiation. I offer a transformation of Weitzman’s diversity measure which may turn it into a useful measure of product differentiation. Further, I apply spatial pattern analysis, a technique frequently used in botany, geostatistics, forestry and other research disciplines. From this starting point, I present several indices, functions and statistics based on nearest neighbor distances and discuss their ability to describe product differentiation in the marketing discipline.


Characteristic Space Product Differentiation Nearest Neighbor Neighbor Distance Neighbor Analysis 
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