Final answer:
A differentiation strategy in competitive business is the development of unique qualities in a product or service to stand out from competitors. Physical traits, location, intangibles, and perceptions are key aspects of product differentiation. Such distinctive products are called differentiated products.
Step-by-step explanation:
A differentiation strategy is a competitive strategy by which a firm develops ways to differentiate its products and services from those of its competitors. Product differentiation allows a company to set itself apart through various means such as the physical aspects of the product, the location from which it is sold, the intangible aspects of the product, and the perceptions of the product. Products that are unique in such ways are known as differentiated products.
In the context of monopolistic competition, many firms sell differentiated products, which helps them to gain a competitive edge and attract consumers who perceive their products as being superior or more suitable to their needs compared to those offered by competitors.