The degree of Product differentiation and conditions of entry of retail grocery market in the Portuguese Economy

Despite of poor and slow economy performance in Portugal, retail grocery market has

shown a rapid growth, alongside sabotaging small and local market. In the same time period other national or international firms are showing keen interest to enter into the market. In such a situation of competitive and eagerness to maximize profit and scalability, firms are comply to present the product and services to target customer in differentiated manner. In this essay I have tried to explore the degree of product differentiation and conditions of entry of retail grocery market in Portuguese economy. 

The retailing of grocery products throughout the Portugal has experienced a profound changes and extension in recent decades. Altering the trend of retailing options, from the small scale, personalized friendly local grocers environment to the large scale, unfriendly, self-service and large-surface outlets. According to a survey done by Horto de Poniente on retail grocery market in Portugal, it is found that there are more than 1,500 supermarkets, hypermarket in its 308 municipalities in Portugal run by more than 5 major supermarkets. On every population of 3000 there is a supermarket. Continente, Pingodoce, Minipreco, Froiz are the major chains with higher number of stores. Even in small localities there is a presence of supermarkets. 

Practically in an open booming market many other competitive firms tries to enter and makes their profits. Still, despite this growing environment, many grocery retailers’ struggles to acquire the competencies needed to compete and survive in the market. Profits determine if firms will enter into a market and what types of products they wish to offer. These choices depend on what firms can expect to earn from their available choices. In the context of oligopoly, a firm’s payoffs depend on the entry and product variety of its competitors as well as on its own choices. Hence, price competition may become harsh if the market contains several operating firms. Firms may also be able to slow the price competition by presenting differentiated products (Mazzeo, 1998). 

In a monopolistic or oligopolistic competition it becomes very important for a firm to differentiate its product and itself with their competitor. This differentiation can help a firm to earn more profit and stay in market for long time period. These product differentiations not only benefit firms but in the same time period it offers the consumer the opportunity to select commodities according to his individual preferences (Lovell, 1970). This essay will discuss concerning the degree of Product differentiation and conditions of entry of retail grocery market in the Portuguese economy. This essay tries to examine the effect of sales and promotion strategy by retail grocery market in product differentiation.

Therefore in a competitive market the company with the higher price will lower its price to the same level as the competitor. Ultimately another company may ignore the standard price in the market and offer the same product at an even lower price. The other opponent firms may have no choice except to lower their prices as well otherwise their business can fall into loss. This can leads to a condition in which the prices are below to the point where no business in the market can make a profit out of that product. Such kind of situation present themselves in markets where products are similar and therefore entering into a business such of this doesn’t seem like profitable. In this kind of situation gaining market share and producing a sizable profit will be very difficult. 

Therefore, according to the principle of differentiation defined by Tirole 1988, firms generally do not want to locate at the same place in the product space. Two firms producing perfect substitutes can face uncontrolled price competition. In contrast product differentiation establishes trades and allows firms to enjoy some market power over these trades. Thus, firms usually wish to differentiate themselves from other firms. If the customers distinguish the differences, then the product of one firm can be less likely to be a perfect substitute for another.

There are two types of Product differentiation vertical and horizontal product differentiation (Ferriera & Thisse, 1995). There are several occasions when consumers prefer one product to another and this situation is termed as vertical product differentiation. Products considered to be horizontally differentiated, if there is no choice amongst consumers, to pay for the products. Products considered to be vertically differentiated, if despite of many firms are supplying the similar products at the same price, individual firm’s product captures the whole demand. Hence, all consumers have the same choices between the different products offered at the same price. 

In a vertically differentiated product, all consumer agree over the most preferred mix of characteristics and more generally, over the preference ordering i.e. a customer can prefer portable and powerful laptop with high memory than a normal desktop computer (Tirole, 1988). While differentiation of products based on characteristics is considered as horizontal product differentiation. In the Hotelling model of spatial or horizontal product differentiation, consumers are defined by their ideal products location (Blaug, Lloyd, 2010). 

Barriers to entry:

Retail grocery market in Portugal has seen a swift change over the past few spans of time and it is still growing. Though supermarkets are growing very rapidly but still they are competing with local independent grocers, although the latter setups are struggling to stay competitive with large retail chains. These competitiveness are so stringent create barrier to enter new player into market.

Market condition places certain restrictions and barriers on the differentiation for example: supermarket cannot be located just anywhere. Adjustment in the potential location is also important to reach out to customers. As this distant location will require additional traveling and opportunity cost and so customer may prefer to go nearer market than other.

Advertising: Many times it is found that advertising may create an invisible barrier to the entry of new firms into industry. Firstly as product differentiation becomes more pronounced consumers become less responsive to price changes. Thus, new firms find it more difficult to establish a position in the market. Advertising also creates barriers to entry by allowing existing firms to realize scale economies (Tirole, 1988).

Customer loyalty: customer loyalty is a membership loyalty card where member customers receive a customized marketing and personalized pricing over products. This kind of trend also motivate customer to stick with specific market. Government regulations: there are certain legislation and discriminant policy, such as heavy tax, restriction with supply and the control of superior product designs through patent protection don’t let enter many new firm into the market. 

Along with this the preferences of buyers for established brands names and company reputations, either generally or except for small minorities of the buying population play crucial role in entry restriction. There can be several definitions for entry barriers may be adopted. Although costs and prices are called for in to identify grasping pricing strategies against entry of new firms, all factors that may make entry an unprofitable operation while existing firms set prices above marginal cost to obstinately earn a monopoly gain may be seen as limitation (Mata, 2009). 

Product or Service Differentiation may be offering greater performance benefits than other competitor. A firm can position their product as a low, medium or high- featured product that satisfies the needs or wants of a particular market segment. So, If a firm is competing with other firms and its similar featured products, than it is important to increase the differences in terms of product, performance, quality, quantity or delivery in offering to make the price comparisons difficult. 

As mentioned in the introduction, products are differentiated because they possess both physical and intangible characteristics that appeal to consumers. Portuguese retail grocery market in the form of supermarket or hypermarket has changed the retail landscape and dominated the food distribution and despite of difficult economics conditions, the retail industry continued to grow. Consumers preferring to purchase preferred good quality product with less price. 

As soon as supermarket’s consumers are growing so the entry of new player despite of barrier and restriction, in such a tight competitive market consumer always prefer to choose best within their limited budget. Therefore it naturally becomes important for firm to differentiate their product and services. However there are limits to differentiation. Although firms are differentiated in individual form such as vertical or horizontal differentiation but actual differentiation takes place in market is mingle of both approach. email: rrpaswan@gmail.com