The impact of product differentiation on market structure depends on the ability of some firms to secure strong advantages over others in this field. This may be the result of heavy advertising and other forms of sales promotion.

 “The impact of product differentiation on market structure depends on the ability of some firms to secure strong advantages over others in this field. This may be the result of heavy advertising and other forms of sales promotion.”
Importance of Product Differentiation:
Regarding the importance of ‘product differentiation’ the following two points may be noted:

(a) Product differentiation often acts as a barrier to entry of new firms into the industry. It may also be noted that advertising enables a firm to achieve product differentiation.

Thus advertising, as Lipsey has pointed out, act as an empty barriers. Well-established firms possess an advantage. They turn out products which are already known to the customers as compared with new unknown products. New firms will have to reduce their prices or improve the quality of their products considerably to enter an industry.

These may impose losses upon them. If people judge quality by price, the new products may be branded as inferior to the established ones. Alternatively, a newcomer may have to incur heavy sales-promotional expenses to try to sell within the prevailing price range.

(b) Profitable product variation may go in various directions. A producer might find that a costly change in his product would increase demand for his output. (For example, a petrol station may moves from cheap location to one that is more expensive, but also more convenient for its customers.) Or he might find that downgrading his product would lower his costs more than it would lower demand for his product and would increase his profits. For example, many producers try to maximise profits by cutting their prices and offering discounts (They provide no credit and little sales help).