Abstract

Firms put enormous intellectual and financial resources into creating differentiated products or services for their consumers. However, in many situations, differentiation may not be a profitable strategy. This article spells out the conditions under which it is profitable to differentiate and those where it is not. Consumers learn about alternatives from advertising, and many consumers do not see advertising for all relevant alternatives. As a result, a significant fraction of consumers make decisions with limited information about the available alternatives. The value of creating differentiated products is ambiguous when the awareness of products and their characteristics is the key determinant of consumer behavior.