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In today's increasingly competitive business environment companies can, and indeed must, respond more rapidly to customers' changing demands, desires, and preferences. In today's information-rich environment customers can comparison shop, get product reviews from other customers, and, in general, become very well informed about what is available in the market. If your offerings are not differentiated, pure price competition will be more extreme than ever before. If your customer thinks your goods and services have direct competitors your prices (and theirs) will be squeezed down to your marginal costs of production! If your offerings are successfully differentiated, then your customers will not see other products as competing directly, or as competing at all effectively. Your prices will be determined by your value to your customers, and not by your costs or your competitors' costs of production. While differentiation has long been a basis of competitive strategy, newly available sources of information do change the nature and importance of differentiation. Information in the hands of customers has increased price pressure on all producers, increasing the need to differentiate your products and services. Information you provide to customers makes it possible for you to communicate your value proposition more effectively, increasing the value you receive from differentiation. Information makes it possible for you to determine what customers want, and makes it possible for you to tailor your design and your production to these needs, supporting accuracy and precision of differentiation. It is not necessary to be better in any absolute sense, or to be more costly to produce; it is merely necessary to be better for individual customers and more valuable to them. Information makes it possible for you to track the changes in behavior, preferences, demands, and desires of your best customers and serve them with precision, accuracy, and cost-effectiveness that competitors will never be able to match.
Clemons et al. (Wed,) studied this question.