Which of the following conditions best supports the effectiveness of a differentiation strategy in economics?

• A. All firms in the market produce identical goods and compete solely on price.
• B. The market is characterized by perfectly elastic demand for all products.
• C. Barriers to entry are extremely high, preventing new competitors from entering the market.
• D. Consumers perceive significant differences among products and are willing to pay a premium for unique features.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a differentiation strategy: it involves firms making their products distinct from competitors' products in ways that are valued by consumers, allowing them to charge a premium price.
2. Recognize that for differentiation to be effective, consumers must perceive significant differences among products, which creates some degree of market power for the firm.
3. Analyze the conditions given: if all firms produce identical goods and compete solely on price, differentiation is not possible because products are homogeneous.
4. Consider the demand elasticity: perfectly elastic demand means consumers will switch immediately to the cheapest product, so differentiation has little effect since price competition dominates.
5. Note that high barriers to entry can protect firms but do not by themselves ensure differentiation; the key is consumer perception of unique product features that justify paying more.