This Market Simulation simulates the Competition between two Products that are neither commodities nor orthogonally differentiated.

These Products, like almost all real-world Products, are “Semi-Orthogonal”. They share common, commodity-like Features that Customers would consider undifferentiating. But they also offer unique Features that provide differentiation.

Products in the same Category often all share undifferentiating qualities. For entertainment, you can either select carnival-entertainment or movie-entertainment. But after you’ve made your selection, each carnival attraction (or movie theater) needs to provide the additional differentiation that will induce you to select them.

There may be a hierarchy of Categories, such as in the Market for food. After you select the “Fast Food” Category you then have to choose the sub-category (hamburgers, chicken, pizza, sandwiches,  etc). So while the food industry as a whole provides a tremendous variety or choices, most restaurants have little room to offer something truly unique, and therefore generate only low margins.

In this Market Simulation, the two Competitive Rivals are selling semi-orthogonal Products. The Products are 80% Commodities and 20% Orthogonal (the user can change the ratio using the ‘Double Input’ node).

Like the results from the earlier MO-112 Orthogonal Price War Market Simulation, each Product can leverage the (reduced) degree of differentiation they do have to be Profitable – even after a Price War, and even when one Product has a Cost disadvantage.

These results are designed to be compared to the previous two Market Simulations:

• MO-111 Commodity Price War
• MO-112 Orthogonal Price War

This Case Study provides provides a glimpse into the premium Market Optimization nodes. These premium nodes are not available in the Free Community Edition of Scientific Strategy. But a selection of problems that can be solved with the Free Community Edition nodes can be found in Case Studies and Market Simulation.

The ‘Double Input’ node allows the user to select the Commodity:Orthogonal ratio. A ratio of 0.8 will generate a Market comprising of two differentiated Products, each having the following Willingness To Pay (WTP):

• RivalA.Sprockets = 80% Commodity Feature + 20% Orthogonal Feature A
• RivalB.Sprockets = 80% Commodity Feature + 20% Orthogonal Feature B

Note that RivalA still has a $10 Cost advantage ($40 per Sprocket vs $50 for RivalB).

See also:

• CN-111 Customer Distributions Node
• CN-131 Product Generator Node

Orthogonal
Feature

In the MO-111 Commodity Price War Market Simulation, both Competitors fought the Price War down to Price = Marginal Cost. At that point the Profitability for both Competitors was zero.

In the MO-112 Orthogonal Price War Market Simulation, the average Customer Willingness To Pay (WTP) was precisely the same. And yet, because the two Products were Orthogonally Differentiated, the Price for both leveled out at around $100 and both Products were Profitable.

In this Market Simulation, with the Products being 80% Commodities and 20% Orthogonal, the steady-state Price settles in between these two earlier extremes at around $65. The jumpiness of the Prices in the charts below illustrate the higher degree of Price Sensitivity each Competitor has when Products are mostly Commodities.

These three simulations illustrate that Markets will largely ignore the Commodity value of Products. Prices will reflect only the unique Orthogonal value that Products provide.

Chart #3
Profit