The viability of a differentiation strategy is severely undermined when the:

• A. market demand for the product is highly elastic
• B. firm faces increasing returns to scale
• C. unique features offered by the product are easily replicated by competitors
• D. cost of production decreases as output increases

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of a differentiation strategy. This strategy involves a firm offering unique product features that are valued by customers, allowing the firm to charge a premium price and reduce direct price competition.
2. Step 2: Analyze how market demand elasticity affects differentiation. If demand is highly elastic, customers are very sensitive to price changes, which can undermine the ability to charge a premium, but this alone does not directly undermine differentiation if uniqueness is maintained.
3. Step 3: Consider the impact of increasing returns to scale. Increasing returns to scale mean that average costs decrease as output increases, which relates more to cost leadership strategies rather than differentiation, so it does not directly undermine differentiation viability.
4. Step 4: Focus on the effect of competitors replicating unique features. If the unique features offered by the product are easily replicated by competitors, the product loses its uniqueness, which directly undermines the differentiation strategy because the firm can no longer maintain a competitive advantage based on uniqueness.
5. Step 5: Evaluate the role of decreasing production costs with output. While decreasing costs can affect competitive positioning, it is more relevant to cost leadership strategies and does not inherently undermine differentiation unless it affects uniqueness.