A Level Economics AQA Practice Exam

What is a direct consequence of increased product differentiation?

1. Lower production costs

2. Increased consumer loyalty

3. Higher risk for small businesses

4. Decreased demand for standard products

The correct answer is: Increased consumer loyalty

Increased product differentiation typically means that firms enhance their products' unique features, quality, design, or branding to make them stand out from competitors. This strategy often leads to enhanced consumer loyalty because consumers may find a specific product more appealing or better suited to their needs compared to others on the market. When consumers perceive a product as unique or superior, they are more likely to develop a preference for that product, leading to repeated purchases. As they associate the differentiated product with positive attributes—such as quality, exclusivity, or brand reputation—consumers are less likely to switch to competing products, even if those competing offerings are priced lower. This loyalty can result in a stable customer base and potentially higher profit margins for the company. In contrast, factors such as lower production costs, risks for small businesses, or decreased demand for standard products are not direct outcomes of increased product differentiation. While those other factors could be influenced by the market dynamics created by differentiation, they do not capture the essence of how product differentiation affects consumer behavior specifically.