Homogeneous Products: Characteristics and Implications

By | Januari 11, 2022

What it is: Homogeneous products are goods or services without unique characteristics that satisfy buyers in the same way. They are characteristic of products in perfect competition and are perfect substitutes for each other. They have far-reaching implications for market forces, competition and the way companies market and earn profits.

Difference between homogeneous product and differentiated product

Homogeneous products contrast with differentiated products. The latter are imperfectly substituted for each other. They satisfy consumers in different ways. For this reason, consumers perceive them to have different values.

Differentiated products exist in imperfect competition such as monopolistic competition and oligopoly. Companies create unique selling propositions to differentiate their products from those of competitors. The difference may be in terms of quality, performance, or even, simply through branding.

Differentiation allows companies to have market power. They can charge a higher price than the price in a perfectly competitive market. The higher the level of differentiation, the greater the chance for the company to charge a premium price. 

Homogeneous product characteristics

First , the product is present in a perfectly competitive market. For imperfect competition, the product is differentiated. Under monopolistic competition, the product is slightly differentiated, for example through packaging, advertising, or other non-pricing strategies.

An oligopoly market can also produce a homogeneous product. Various commodities such as copper, aluminum, lead, cement, sugar are examples.

Second , the products are perfectly substituted for each other. They provide the exact same satisfaction. They are physically identical. Commodities such as corn, soybeans and milk are examples. They may come from several companies. And, without packaging, they are difficult for us to distinguish.

Third , there is no consumer loyalty. Since they are identical, there is no reason for consumers to prefer one product over another. The consumer does not bear the switching costs. Thus, when a company raises its selling price, they switch to another product.

Fourth , producers usually take the market price as the selling price of the product. In a perfectly competitive market, homogeneous products make the company not have the market power to set a price above the market price. The size of the company is also relatively small so it cannot affect the market supply. 

For an oligopoly market, the number of players is indeed small. However, because the products are identical, consumers will switch to competitors once the firm raises prices.

Homogeneous products in an oligopoly market

Firms in oligopoly markets can produce differentiated products or homogeneous products. The degree of differentiation may be low, for example through brands such as Pepsi and Coca Cola. Or, it may be high as through features or quality.

Meanwhile, good examples of homogeneous products in oligopoly markets are mineral and agricultural commodities. They tend to be standardized so that buyers don’t see real differences between products.

There are several implications of a homogeneous product in an oligopoly market:

First , price is the single most important dimension of market competition. The company will try to dominate the market to generate high sales volume. That way, they can achieve high economies of scale and produce efficiently.

On the other hand, because the products are identical, the switching costs are low. Consumers see price as the only reason they buy. If companies raise prices, they turn to competitors.

Second , economies of scale are important. Companies rely on mass production to produce standardized products. In this way, they can achieve high economies of scale and lower average costs.

Reducing costs allows the company to set a lower selling price to generate higher sales volume. It also helps improve profitability.

Third, collusion often occurs, either implicitly or explicitly (cartel). An example is the Organization of the Petroleum Exporting Countries (OPEC) in the world oil market. An oligopoly market has few players. Thus, they are easier to coordinate and cooperate to influence market prices and profitability.

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