Branding and Product Differentiation

Further to our discussion of spurious differentiation, here’s a note on why people buy branded instead of generic over-the-counter medications. We’ll look at advertising later in the term, and will try to fit in a brief overview of search costs. So here is Planet Money on generics.

Cadillac in China

http://www.autonews.com/apps/pbcs.dll/article?AID=/20121111/GLOBAL03/121109851/gm-wooing-chinas-affluent-preps-cadillac-makeover

Here’s an article from Automotive News on the expansion of luxury car brands into the growing Chinese markets. With China now the world’s largest car market and with a luxury market already rivaling those of the west, car makers are scrambling to appeal to Chinese consumers and gain market share in this increasingly competitive market. [Yes, because everyone is there now and the easy pickings have been had … margins aren’t what they used to be, and we’re starting to see winners and losers. Before we only saw winners and bigger winners…]

GM is counting on the success of Cadillac in the Chinese market to keep the brand afloat, but recently the luxury brand’s penetration has fallen behind not caught up with German luxury cars like Audi, Mercedes, and BMW. Many attribute this recent decrease in the chinese market to a design which does not appeal to the preferences of Chinese Customers. While Cadillac’s bold and futuristic look, with sharp curves and angles, has appealed to many American customers, the confucian foundation of Chinese culture, and a preference for ‘Zhongyong’ leads consumers there to see the car as too “bold and harsh.”

With success in China paramount to Cadillac’s survival, GM is now altering the design of the cars to cater to Chinese preferences, adopting a less acute, more contemporary look. How might this affect Cadillac? Will the increased costs caused by producing different products for American and Chinese markets cover the benefits of increased market shares in China? Think back to Minimum Efficiency of Scale. If Chinese consumers have different preferences for luxury cars than Western consumers, how might the car companies react? Would they attempt to separate operations or find a middle ground between preferences which allows them to enjoy the production efficiencies of producing a product at large quantity to serve both markets?