Final answer:
Product differentiation is when a company adds new variations like flavors, forms, or sizes to its existing product line under the same brand. It is a strategy used to compete in markets of monopolistic competition by making products seem unique. Bundling is related but involves selling multiple products or services together at a discount.
Step-by-step explanation:
When a company introduces additional items in a given product category under the same brand name, such as new flavors, forms, colors, ingredients, or package sizes, this process is called product differentiation. Product differentiation is a key strategy that firms use to make their products stand out from their competitors'.
It's crucial in a market characterized by monopolistic competition, where companies compete with others that have similar but not identical products. This kind of competition involves a blend of a mini-monopoly on a particular product variation, along with intense competition with other similar products.
A similar strategy is bundling, where a company combines two or more products or services into one package, often at a reduced price. Bundling is advantageous for consumers because they can acquire multiple goods or services at a more favorable price. As an example, many cable companies offer bundled services like television, internet, and phone service.
While customers have the option to purchase these services separately, the bundle often provides a financial incentive. However, bundling differs from product differentiation because it involves offering a set of products or services together rather than variations of a single product.