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Product Profusion and Packaging
Subject Assumptions, comparative statics, pros and cons
Topic Monopolistic Competition
Key Words Product differentiation, brand
News Story

Package design is an increasingly important way of differentiating one's product from those of competitors. As the number of products grows, it becomes harder for consumers to make choices on a rational basis, so they rely on their emotions more. Where products are similar, color, shape, and texture can provoke positive emotional responses in consumers at the point of purchase.

Beverage marketers have been the leaders in using packaging to differentiate their products. Coca-Cola developed a unique design for its bottle. Absolut Vodka built its brand on the shape of its bottle. Now the Salon Selectives shampoo and conditioner line has moved from a mass-marketed brand status to salon-brand status with new package colors and names, such as "Rain".

Where the packaging adds functionality, the appeal to the consumer is even greater. Hence Gatorade has designed a bottle that is easy to grip, does not spill when thrown on the ground, and is easy to drink from. Now yogurt can be purchased in squeezable form, so that it can be eaten more easily without a spoon. Dentyne Ice has become the third-ranked gum, number one among older chewers, due to its repackaging in blister packs. It has been able to raise its price 79 cents a pack.

The business of package design is now worth over $100 billion a year. Firms frequently call in design specialists to help them optimize their packaging.

(Updated March 1, 2001)

Questions
1. Why do the markets for drinks and hair care products approximate monopolistic competition?
2. a) Draw a diagram of a representative firm in the market for hair care products. Show the demand and marginal revenue curves and the average total and marginal cost curves. Mark the initial equilibrium price and output. Shade the area representing the amount of profit.
b) Show the implications of an increase in the number of hair care products on the market for the equilibrium of the representative firm. What happens to the firm's price, output and profit?
3. a) In another diagram of a representative firm in the hair care industry, show how packaging which differentiates the hair care product and leads to brand loyalty affects the demand curve.
b) With reference to your diagram, explain how this can enable the firm to charge a higher price, sell more output, and make more profit.
4. The businesses of packaging and packaging consulting are huge. Is this a good thing for consumers? List the advantages and disadvantages with reference to the news story. Are there any other considerations that are perhaps not mentioned in the news story?
Source Theresa Howard, "Color me popular: Marketers shape up packaging," USA Today, February 8, 2001.

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