Quarterly Journal of Austrian Economics

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Product Differentiation and Economic Progress

The Quarterly Journal of Austrian Economics

Tags Monopoly and Competition

07/30/2014Randall G. Holcombe

Volume 12, No. 1 (2009)


In neoclassical theory, product differentiation provides consumers with a variety of different products within a particular industry, rather than a homogeneous product that characterizes purely competitive markets. The welfare-enhancing benefit of product differentiation is the greater variety of products available to consumers, which comes at the cost of a higher average total cost of production. In reality, firms do not differentiate their products to make them different, or to give consumers variety, but to make them better, so consumers would rather buy that firm’s product rather than the product of a competitor. When product differentiation is seen as a strategy to improve products rather than just to make them different, product  differentiation emerges as the engine of economic progress. In contrast to the neoclassical framework, where product differentiation imposes a cost on the economy in exchange for more product variety, in reality product differentiation lowers costs, creates better products for consumers, and generates economic progress.


Contact Randall G. Holcombe

Randall G. Holcombe is an Associated Scholar of the Mises Institute, DeVoe Moore Professor of Economics at Florida State University, past President of the Public Choice Society, and past President of the Society for the Development of Austrian Economics. He received his Ph.D. in economics from Virginia Tech, and has taught at Texas A&M University and Auburn University. Dr. Holcombe is also Senior Fellow at the James Madison Institute and was a member of the Florida Governor’s Council of Economic Advisors. His books include From Liberty to Democracy: The Transformation of American Government (2002), Producing Prosperity (2013), and Political Capitalism: How Economic and Political Power Is Made and Maintained (2018). His primary areas of research are public finance and the economic analysis of public policy issues.

Cite This Article

Holcombe, Randall G. "Product Differentiation and Economic Progress." The Quarterly Journal of Austrian Economics 12, No. 1 (2009): 17–35.