Ok, the Honda City is not that ugly; I just thought it would make a great headline. But still, the Honda City is not exactly everyone’s dream car. Are Honda designers not talented? Surely they could come up with a better design? Yes, quite easily, I’m sure. It’s just that Honda is applying a slightly different twist on the basic microeconomic principle of price differentiation.

Price differentiation means selling the same product at different prices in different markets. The ultimate objective is to charge each buyer the maximum that he or she is willing to pay. However for the car industry this is not possible; it might even be illegal. By having different categories of the same basic product, sellers attempt to implement price differentiation, but in a justifiable and completely legal way.

I read somewhere that a computer hardware manufacturer has two versions of a laserjet printer: the difference is that one is faster than the other. In reality, the two models are exactly the same, except that one has been deliberately programmed to have lower throughput. Of course, the “faster” model is priced higher. So customers who are able to afford it will go for the perceived higher-end product. This way, the printer manufacturer will get more revenue than if it were to sell just the one model.

Thus, the City is not looking as good as it could be because Honda does not want people who could afford the Accord or the Stream to be content with the City. The fact is that the Accord, the Camry, the Perdana V6 and such carry very high profit margins. Honda, Toyota, Nissan et. al. are no longer content to be mere volume producers of low-margin cars – by making their entry-level models not very desirable, they ensure that people strive to upgrade to their higher-margin offerings.