Other entry deterrence strategies

Pricing is not the only strategy that firms adopt in order to deter entry by new firms. Another approach that has been used over a wide range of economic activities is to raise the fixed costs of being in the industry.

Advertising and publicity

Advertising can be regarded as a component of fixed costs, because expenditure on it does not vary directly with volume of output. If the firms in an industry typically spend heavily on advertising, it will be difficult for new firms to become established, as they too will need to advertise heavily in order to attract customers.

Similarly, firms may spend heavily on on achieving a well-known brand image that will ensure customer loyalty. Hence, they may invest a lot in the design and packaging of their merchandise. One such example was the high profile TV campaign run by Sunny Delight, when trying to get into the soft drinks market in the early part of the twenty-first century.

Notice that such costs are also sink costs, and cannot be recovered if the new firm fails to gain a foothold. It has sometimes been suggested that the cost of excessive advertising should be included in calculations of the social cost of monopoly.

Research and development

A characteristic of some industries is the heavy expenditure undertaken on research and development. A prominent example is the pharmaceutical industry, which spends large amounts on researching new drugs – and new cosmetics.

This is another component of fixed costs, as it does not vary with the volume of production. Again, new firms wanting to break into the market know that they will need to invest heavily in R&D if they are going  to keep up with the new and better drugs and cosmetics that are always coming onto the market.


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