Although such brand proliferation is no doubt partly a response to
consumers’ preferences, it can also have the effect of discouraging the
entry of new firms. To see why, suppose the product is the type for which
there is a substantial amount of brand switching by consumers. In this
case, the larger the number of brands sold by existing firms, the smaller
the expected sales of a new entrant.
Assume, for example, that an industry contains three large firms, each
selling one brand of beer, and say that 30 percent of all beer drinkers
change brands in a random fashion each year. If a new firm enters the
industry, it can expect to pick up one-third of the customers who change
brands (a customer who switches brands now has three other brands
among which to choose). The new firm would get 10 percent (one-third
of 30 percent) of the total market the first year merely as a result of
picking up its share of the random switchers, and it would keep
increasing its share for some time thereafter. If, however, the existing
three firms have five brands each, there would be 15 brands already
available, and a new firm selling one new brand could expect to pick up
only one-fifteenth of the brand switchers, giving it only 2 percent of the
total market the first year, with smaller gains also in subsequent years.
The larger the number of differentiated products that are sold by existing oligopolists, the
smaller the market share available to a new firm that is entering with a single new product.
Brand proliferation therefore can be an effective entry barrier.- Advertising as an Entry Barrier