In addition to producing useful information about existing products,
advertising can operate as a powerful entry barrier by increasing the costs
of new entrants. Where heavy advertising has established strong brand
images for existing products, a new firm may have to spend heavily on
advertising to create its own brand images in consumers’ minds. If the
firm’s sales are small, advertising costs per unit will be large, and price will
have to be correspondingly high to cover those costs. Consider Nike,
Reebok, and their competitors. They advertise not so much the quality of
their athletic shoes as images that they want consumers to associate with
the shoes. The same is true for cosmetics, beer, cars, hamburgers, and
many more consumer goods. Successful ads are usually expensive to
produce and can constitute a formidable entry barrier for a new producer.
A new entrant with small sales but large required advertising costs finds itself at a substantial
cost disadvantage relative to its established rivals.The combined use of brand proliferation and advertising also creates a
powerful entry barrier. The soap and beer industries provide classic
examples of this behaviour. Because all available scale economies can be
realized by quite small plants, both industries have few natural barriers to
entry. Both contain a few large firms, each of which produces an array of
heavily advertised products. The proliferation of brands makes it harder
for a new entrant to obtain a large market niche with a single new
product. The heavy advertising creates an entry barrier by increasing the
average costs of any new firm trying to establish its own brand image.