No universal agreement exists that confirms one product is better than another product that fulfills the same need. Instead, consumers must select a product for purchase in part based on the comparison of the merits of one product versus another. Horizontal differentiation enables the consumer to identify a product that offers the most features of interest in a particular price range. Therefore, a seller attempts to distinguish its product from that of another company hoping some customers will purchase the product because it is more appealing than competing products.

Product Differentiation

In terms of product differentiation, it doesn't matter if a product is predominantly the same or different than another product. What matters is the degree to which consumers perceive a difference in products. The greater the perceived difference, the higher the probability that brand loyalty will develop, which affects a company's competitive position and market share. Therefore, a company, such as an automobile manufacturer or bread maker, may offer new products or change existing products to accomplish differentiation.

Horizontal Differentiation

Horizontal differentiation exists when one product's attributes vary from those of another product in ways that satisfy the needs of a particular customer group. For example, variations in the design, size, fabric or color of a dress constitute horizontal differentiation. A manufacturer offers a particular mix of product attributes to create a brand that appeals to certain customers. The greater the number of product characteristics that customers may perceive to be product benefits, the stronger the horizontal differentiation will be. Horizontal differentiation is less strong for simple products, such as erasers, which have few attributes that are of interest to a consumer.

Example of Horizontal Differentiation

The focus of horizontal differentiation is the willingness of the consumer to substitute one product for another. For example, assume that product A and product B are two different brands of potato chips, which are priced the same. Also, assume that consumer group C does not consider product B to be a good substitute for product A. Therefore, these consumers will buy product A even if the chips are sold at a higher price than product B. Now assume that consumer group D does not accept product A as a good substitute for product B. As a result, this group will pay more to buy product B rather than buy product A. Products A and B are horizontally differentiated because neither group considers one brand of chips to be a good substitute for the other.

Horizontal Differentiation and Demand

Companies that market horizontally differentiated products have demand curves – graphs that relate price to quantify demanded -- that slope downward. If horizontal differentiation is weak, demand for product A is sensitive to a price change for product A or product B. For example, if the price of product B is stable, a small increase in the price of product A will result in a large decrease in the quantity demanded for product A. If the price of product A is stable, a small increase in the price of product B will also result in a large decrease in the demand for product A. If horizontal differentiation is strong, demand for product A is less sensitive to a price change for product A or B. A small price increase for product A will lead to a small decrease in the quantity of product A demanded. In addition, a small price increase for product B will lead to a small decrease in demand for product B.