different, but is it better?
Professor Mike Mazzeo seeks to quantify the value of differentiation
by Rebecca Lindell
Professor Michael Mazzeo had been driving all night. As he
turned off the South Dakota interstate to look for a place
to sleep, he spied three economy motels -- two on the other
side of the highway, and one on his side.
time of night, most people would have made a beeline to the
closest motel, checked into the first available room and fallen
asleep before their heads hit the pillow. Mazzeo, an industrial
organization economist, was suddenly wide awake.
'I wonder if I'd get a better price if I crossed the street,
because of the effort I'd have to make to get there?'" says
the assistant professor of management and strategy. "Then
I began wondering about product differentiation, and what
happens in markets where products are very similar. I thought,
'Let's measure the price differences between competitors offering
similar products. How important is it for products to be different
from each other, and when does it pay off?'"
began Mazzeo's research foray into how firms decide to make
their products unique.
think about this all the time, down to the minute level,"
he says. "Where should they locate branch offices? What type
of products should they offer? Say you want to cut the fat
content in your product, but it will cost you more to put
in a certain sort of oil, instead of butter. Under what circumstances
will it be worth it to you to do so? Does it depend on whether
your competitors use oil or butter? What I'm trying to do
is quantify how important it is to differentiate."
this, Mazzeo set up a mathematical model that analyzes the
impact additional competitors will have on the profitability
of a particular firm. The model also explores how the effects
will vary if the competitionıs product is different in some
way from that of the company in question.
of research has analyzed the effects of competitors, Mazzeo
notes. But the models other researchers have created have
not taken into account the product types of competing firms.
one firm does isnıt the only thing that affects outcomes,
because other firms will respond," he says. "If they all offer
the exact same product, the competition will be very intense.
If the new product is slightly different, more can be successful."
his findings, he turned to the market that had inspired his
late-night musings: the motel industry. His results suggested
that motel firms can earn substantially higher payoffs by
differentiating themselves -- that is, offering lodging at
differing levels of quality. However, the demographics that
affect demand -- the population of the town in which the motel
is located, the traffic that passes by the motel and the distance
between highway exits -- can be significant, to the point
that firms can have no incentive to offer something unique.
The result: motel after identical motel.
project was kind of a way to test out the methodology and
work out the statistical analysis involved," Mazzeo explains.
"This is a fun type of research field to be in, because itıs
really data-intensive. I can collect data from a large number
of markets and get as many observations as possible to reach
conclusions about what happens in other industries."
did Mazzeo decide to stay on that late-night drive across
with my economic intuition," recalls the professor. "I went
to the side of the highway that had the two motels on the
same side, assuming that prices would be lower on that side.
Later I collected data from this market, and just as youıd
expect, the less differentiated motels have the lower prices!"