What’s it: Homogeneous products are goods or services without unique characteristics and satisfy buyers in the same way. They are characteristics of products in perfect competition and are perfect substitutes for each other. They have far-reaching implications for market power, competition, and the way companies market and profit.
Difference between homogeneous products and differentiated products
Homogeneous products are in contrast to differentiated products. The latter imperfectly substitute each other. They satisfy consumers in different ways. For this reason, consumers perceive them to have different values.
Differentiated products arise in imperfectly competitive markets like monopolistic competition and oligopoly. Companies create unique selling propositions to differentiate their products from competitors’ products. Such differences may be in terms of quality, performance, or even merely through branding.
Differentiation allows firms to have market power. They can charge a price higher than the price in a perfectly competitive market. The higher the differentiation level, the greater the chance for the company to set a premium price.
Homogeneous product characteristics
First, the product is present in a perfectly competitive market. For the imperfect competition, the product is differentiable. Under monopolistic competition, products are slightly differentiated through packaging, advertising, or other non-pricing strategies.
The oligopoly market can also produce homogeneous products. Various commodities such as copper, aluminum, lead, cement, sugar are examples.
Second, the products perfectly substitute each other. They provide the exact same satisfaction. They are physically identical. Commodities such as corn, soybeans, and milk are examples. They may come from several companies. And, without packaging, they are difficult for us to distinguish.
Third, there is no consumer loyalty. Because they are identical, there is no reason for consumers to prefer one product over another. Consumers do not bear switching costs. So, when a company increases its selling price, they switch to other products.
Fourth, producers usually take the market price as the selling price of the product. In perfectly competitive markets, homogeneous products leave firms with no market power to charge above-market prices. The size of the companies is also relatively small, so they cannot influence market supply.
For the oligopoly market, the number of players is small. However, because the products are identical, consumers will turn to competitors once the firm raises prices.
Homogeneous product in an oligopoly market
Firms in an oligopoly market can produce differentiated or homogeneous products. The level of differentiation may below, for example, through brands such as Pepsi and Coca-Cola. Or, it may be as high as through features or quality.
Meanwhile, good examples of homogeneous products in oligopoly markets are mineral and agricultural commodities. They tend to be standardized, so buyers don’t see any real differences between products.
There are several implications of a homogeneous product in an oligopoly market:
First, price is the most critical dimension of market competition. The company will try to dominate the market to generate high sales volume. That way, they can achieve high economies of scale and produce efficiently.
On the other hand, because the products are identical, the switching costs are low. Consumers see price as the only reason they buy. If firms raise prices, they turn to competitors.
Second, economies of scale are essential. Companies rely on mass production to produce standardized products. That way, they can achieve high economies of scale and lower average costs.
Reduced costs allow the company to set a lower selling price to generate a higher sales volume. It also helps improve profitability.
Third, collusion often arises, either implicitly or explicitly (cartel). An example is the Organization of the Petroleum Exporting Countries (OPEC) on the world oil market. The oligopoly market has few players. Thus, they are easier to coordinate and cooperate to influence market prices and profitability.