David J. St.

Clair

Microeconomics for Managers

Chapter 9
Barriers to Entry

In the last chapter, we argued that the nature of equilibrium in price

searching markets depended on the nature and extent of barriers to entry.
Barriers to entry are characteristic of all three price searcher market structures monopoly, oligopoly, and monopolistic competition - but the source and strength
of these barriers are quite different in each instance. Whether a barrier is strong
or weak depends on its ability to keep the competition of capitals at bay (i.e., its
ability to slowdown or eliminate the competition of capitals).
At one extreme, monopoly can only exist with very strong barriers that can
completely keep out the competition. Aside from government-sponsored barriers,
barriers this strong are very rare. As a consequence, monopoly in the strict sense
is very rare.
At the other extreme is monopolistic competition. In this market structure,
product differentiation is the only barrier to entry and it is usually too weak to
provide any significant relief from the competition of capitals.
Oligopoly (what the public usually calls monopoly) occupies the messy
middle ground. This is where the nature and the strength of barriers are most
critical to understanding an industry.
Since barriers to entry are so critical, it is worth looking at where firms
have found them. Of course, business is always forward-looking and the real
issue is where businesses in the future will find barriers to entry. But a look at
past cases may suggest where they might look.
Where not to look: Size Alone is not a Direct Barrier to Entry
One of the most common mistakes that people make regarding barriers to
entry is to treat size or market share as a barrier. Market share is a measure of
the size of a firm vis--vis its market (i.e., a market share of 45% means that the
firm sells 45% of the output of that horizontal market). As such, market share is
not a barrier to entry unless large size enables the firm to erect a true barrier. For
example, economies of scale are often the source of barriers to entry and only
large firms can obtain the large output necessary to realize economies of scale.
In this case, larger firm size is an indirect source of the barrier to entry created by
economies of scale.

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Least this discussion sound too philosophical or border on splitting hairs,

lets quickly state the reason for the distinction: unless we are talking about
economies of scale, market share is more often than not the product of barriers
to entry rather than the source of barriers to entry. For example, Intel is big
because it has barriers to entry; it does not have barriers to entry simple because
it is big. A firm can augment and protect market share with barriers; but aside
from economies of scale, market share alone will not create a barrier.

Common Sources of Barriers to Entry

Reputation Effects
Some firms are able to earn economic profits that are not readily
competed away because of their reputation. In other words, new firms
may be unable to attract customers because of the reputation of the
established producer. This has been the case in breakfast cereals in the
past, in automobiles, and in many high-profile brand names.
One interesting thing about reputation effects is that they typically
take a long time to develop, a long time to lose, and an even longer time
to regain. For example, American automobile companies acquired a
reputation for quality, performance, and styling over three to four decades
from the 1920s. American car producers then became rather complacent
and failed to match Japanese producers in all of these areas. Again, it
took decades for Made in America to acquire a reputation for poor
quality. Today, there is considerable evidence of a revival of American
quality and performance, but the reputation for shoddy merchandise
lingers. Complaints from American producers may be justified, but they
have no one to blame but themselves.
On the other hand, while it usually takes a long period of time to
establish or change a reputation, some reputation effects seem to be
readily transferable. Again, the automobile industry is a good example.
Jaguar, Land Rover, Lamborghini, and Rolls Royce are but a few
examples of reputable brand names that have been acquired by other
firms. In these cases, the reputation of the product seems to outweigh the
reputation of the acquiring firm. In fact, the perception of nationality
persists as well. For example, Jaguar is, to the public, a British sports car,
however, it is (or was) owned by Ford. Lamborghini is owned by
Volkswagen. These ownership changes have not changed the publics
perception. Or consider Rolls Royce - how many people realize that it is
made by BMW, a German firm, rather than being a venerable British
label?

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This poses an interesting opportunity/issue for some automobile

producers in developing companies. For example, in early 2007, Tata
Motors, an Indian firm, successfully bid to acquire Land Rover and Jaguar
from Ford. On the plus side, the reputations of these brands will probably
follow the sale. Will Tata gain in reputation in the West if the public still
views these two products as being British? This is worth watching.

Excess Capacity
In the late 1800s, Alcoa had created a de facto barrier to entry
through its practice of building aluminum refining capacity in anticipation of
future demand. Although there is no evidence that they were trying to
create a monopoly, the practice did amount to a formidable barrier and the
firm was convicted of being a monopoly (based on the market share see
the last chapter).
Notice that excess capacity retards or eliminates entry because a
new firm must first commit resources to enter, and then try to wrest market
share away from its larger (and still expanding) rivals. The problem is
made worse by the fact that excess capacity means that prices will likely
drop dramatically as the new firm comes in.

Economies of Scale
Economies of scale inhibit or eliminate entry for two related
reasons: First, significant economies of scale mean that a new firm can
only survive in an industry by quickly becoming a large producer. Failure
to attain a large volume of output and sales will handicap the firm with high
costs.
Second, large scale often requires very large capital outlays. This
increases the risks of entering the industry. If you want to compete with
Intel or General Motors, you must have a large amount of capital. Huge
capital requirements often create a formidable barrier to entry.

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Natural Monopoly
An extreme case of economies of scale arises in the case of a
natural monopoly. A natural monopoly is an industry where there are
significant economies of scale over a range of output that can supply the
entire market. In this case, one large firm can supply the entire market
most efficiently. A second or third firm in the industry would simply force
each firm to operate at a smaller scale and therefore have higher costs.
More importantly, three firms in the industry (or even two) will never last
one firm can push the others out by expanding its output. This will give it
lower costs and force its rivals to have higher costs. The expanding firm
can use its lower costs to continue to expand output until it alone survives.
Natural monopolies are rare in the world and occur primarily in
utility industries. Most of these utilities are operated as regulated utilities.
Since there are economies of scale, breaking up one of these utilities
would be cost ineffective instead, they are operated as regulated utilities
to ensure that they do not abuse their monopoly power.

Learning Curve Effects

Learning curve effects occur when firms learn how to reduce their
costs as they gain experience through actual production. As such, learning
curve effects are based on cumulative volume (not current period volume).
This means that this is not an economy of scale per se. However, the firm
with the larger scale will get a jump on smaller firms in accumulating
experience that can give it a cost advantage. This in turn creates a barrier
to entry.
For example, suppose that you wanted to produce microprocessors
and compete with Intel. You would immediately encounter economies of
scale, huge capital requirements, etc. in your quest. In addition, Intel
would have learned quite a bit while producing all of its chips. This will
give Intel a cost advantage. True, you will also acquire the expertise and
reap cost reductions as your cumulative volume increases, but will you
ever catch up with Intel? It would be tough.

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Licenses and Patents

Government licenses and patents are often very strong barriers to
entry. In fact, patent monopolies are deliberately created by government to
encourage R&D that will develop new technologies. Taxi medallions
restrict entry into the taxi industry and transit agencies usually operate as
government sanctioned monopolies you cannot run a bus line to
compete with a transit franchise, whether it is a government agency or a
private franchise.
Monopolies created by government are, in fact, quite common and
pose numerous problems associated with monopoly restrictions as well as
influence pedaling by firms seeking government sanction for their
monopolies. The following historical example is from Japan:

Example: Licenses to Brew Beer in Japan

The Japanese beer market is large and very concentrated. Four
firms Kirin, Asahi, Sapporo, and Suntory dominate the market with a
combined market share of about 98 percent. Kirin alone has a market
share of about 50 percent with an annual production volume that rivals
that of the worlds largest brewers. Japanese brewers have also been very
profitable.
There are significant economies of scale that promote large scale
brewers. In addition, Japanese brewers have developed formidable
customer brand loyalties that have deterred entry. However, these barriers
to entry have been bolstered by Japanese government policies that have
protected brewer profits from the competition of capitals.
Japanese brewers are taxed by the Ministry of Finance. In addition,
the Ministry of Finance requires brewers to have a brewing license.
However, prior to 1994, the Ministry of Finance would not issue a brewing
license to any producer that produced less than 2 million litres of beer
annually. While 2 million litres is small compared to the 7 billion litre
Japanese beer market, it is a formidable barrier to entry for new start-up
brewers.
In 1994, the barrier to entry was dramatically reduced when the
licensing threshold was reduced to 60,000 litres. This has enabled many
small Japanese micro brewers to enter the market.

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Control over a Strategic Input

Some firms are able to restrict the competition of capitals by
controlling a strategic raw material or input. This control is used to exclude
would-be competitors. Two historical examples illustrate this barrier:

Example: DeBeers: Attempts at Monopoly via the Control of Diamond

Mining
For decades, the DeBeers Company enjoyed a virtual monopoly in
the market for gem-quality diamonds. It was able to keep competitors out
of this market by restricting access to South African diamond mines. Until
the 1980s, South African diamond mines were the only commercial source
of gem diamonds outside of the Soviet Union. The Soviets often sold
diamonds at prices below DeBeers prices, but DeBeers was able to come
to an agreement with the Soviets that maintained its monopoly prices.
While DeBeers often complained about Soviet cheating, the arrangement
worked fairly well. However, the collapse of the Soviet Union flooded the
market with diamonds from Russian mines. The new Russian supply and
other significant discoveries in West Africa and Australia broke the
DeBeers monopoly. Officially, DeBeers no longer seeks to maintain
diamond prices.

Example: Topps Baseball Cards: Monopoly via the Control of an

Essential Input
Topps Company, Inc. is a New York company that created the
modern baseball card. It specializes in producing collectable sports cards
as well as other collectable cards. For example, the firm made collectable
Beatles cards in the 1960s and is currently marketing a set of cards
commemorating the Presidential election of Barack Obama. The company
can trace its roots back to 1890 when Morris Shorin founded the American
Leaf Tobacco Company to import Turkish tobacco into the United States
for re-sale to U.S. tobacco firms. (Note: this is not the American Tobacco
Company discussed above.) During World War I, the supply of Turkish
tobacco was cut-off (Turkey was an ally of Germany in the war) and
Shorin was forced to abandon the tobacco business. Instead, he put his
tobacco distribution channels to work marketing chewing gum.

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The Topps Company was founded in 1938 as Topps Chewing

Gum. The name referred to Shorins goal of making the company the top
in its market. Its original product was a penny candy called "Topps Gum."
After World War II, the company developed Bazooka Bubble Gum and
distributed its gum with a small comic strip.
In 1950, Topps tried promoting its chewing gum with cards that
featured a popular television cowboy - Hopalong Cassidy. In 1951, Topps
added baseball trading cards to promote its candy and gum sales. By
1952, Topps had created the modern baseball card and was signing
baseball players to exclusive contracts to appear on cards sold with
chewing gum. A four year battle with Bowman Gum, another firm making
baseball cards, over exclusive contracts with players ended with Topps
buying Bowman Gum in 1956.
In 1959, Fleer, another firm seeking to enter the baseball card
market, was able to sign an exclusive contract with baseball super star
Ted Williams. However, Williams was in his final playing year and Fleer
was unable to get any other baseball players to appear on Fleer cards due
to their exclusive contracts with Topps. Topps had effectively created a
baseball card monopoly by controlling an essential input in the card
business players. Fleer was forced to feature its Ted Williams card as
part of a set of baseball greats, that is, past baseball stars who were no
longer playing and who were not under contract to Topps. Fleer managed
to produce two baseball greats series before introducing a small set of
cards with current players in 1963. However, the current-player series was
still hampered by an inability to sign many players due to their contracts
with Topps. Fleer sold its remaining player contracts to Topps in 1966 and
abandoned the field.
Topps once again had a monopoly on baseball cards, however, the
experience with Fleer had peaked the interest in the Major League
Baseball Players Association (MLBPA) in breaking the Topps monopoly
and/or renegotiating player contracts with Topps. The MLBPA initially put
player images on Coca-Cola bottle caps and even approached Fleer
about signing a contract that would cover all MLBPA members on baseball
cards. However, Fleer declined. Also, in 1970, Kellogg Cereal began
putting 3-D baseball cards in its cereal boxes. Topps considered this move
to be an effort to market cereal rather than an attempt to enter its market
and it chose to ignore it.
However, Fleer went to court in 1975 with a $17.8 million antitrust
suit against Topps that alleged that Topps' exclusive contracts with the
MLBPA amounted to an anti-competitive practice. In the early 1980s, the
court ruled against Topps and against the MLBPA. The court ordered
Topps to refrain from enforcing the exclusivity clauses and it ordered the
MLBPA to enter into at least one licensing contract with another card
company by 1981. Fleer was awarded small damages.

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On appeal, a higher court reversed the decision, ruling that the

Topps contracts only covered baseball cards sold with gum and other
candies. The appeals court ruled that this did not preclude competitors
from signing players to contracts for cards distributed with other products.
As a result, Fleer and other companies were able to effectively sidestep
the Topps monopoly by distributing baseball cards with products other
than gum or candy (e.g., logo stickers, small puzzles, etc.).
Topps remains a major player in the baseball card market, but its
monopoly built on exclusive player contracts has been breached by
competitors.

Control over a Critical Technology

The examples above relate to firms using their control over a raw
material or essential input as a barrier to entry. Control of an essential
process or technology might be equally effective. The following historical
example illustrates this:

Example: New York Producers Monopolize the Vermillion Dye Market

in the 1880s
Four New York firms developed a secret formula for making high
quality vermillion dye. Vermillion was a dye made from mercury. The New
York cartel was able to undercut all rivals with their secret process.
Because it was a secret, potential producers were unable to enter the
market. The formula has remained a secret even to this day; however,
creative destruction in the form of competition from new synthetic dyes
soon made mercury-based vermillion an expensive and less desirable
product. The cartel was never able to survive the competition from
synthetic dyes.

Deliberately Creating Incompatibility

A barrier to entry could be created by making your competitors products

incompatible - and therefore not substitutes to your product.

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Example: HP and Printer Cartridges

The HP Company makes printers and printer supplies. The
business of printer replacement cartridges is a very lucrative business that
has prompted the competition of capitals; other firms began marketing
replacement cartridges for HP printers. HP responded by embedding a
chip in the printer and/or cartridge that made cartridges from other firms
incompatible with the HP printers. The goal was to create a barrier to entry
that would keep new comers out of the replacement market. This practice
is currently under scrutiny from both American and European antitrust
regulators and HP has backed away from the practice. Its future status is
not yet known.

Product Differentiation
Many firms differentiate their product through the use of brand names
and by creating unique or readily identifiable features as a way of creating
a barrier to entry. Automobile companies do this, as do soft drink
companies. Competitors cannot infringe on a brand name, making their
substitute products less than perfect substitutes. In addition, some firms
take product differentiation one step further, using ongoing differentiation
to create a moving target that serves as a barrier to entry. With continual
differentiation, the competition is left copying what you did yesterday, even
as you are moving to a different version, model, etc. The Barbie doll
serves as a good example of this strategy and a brief history of Barbie is
presented in the Appendix below. If you have (or had) a Barbie, this might
also be an excellent nostalgic trip. If playing with Barbie dolls is not your
thing, treat it as a good example of using differentiation to create a moving
target. It is also an excellent look at entrepreneurship in action - and a
chance to connect with your feminine side. (Dont worry - the estrogen
rush is minimal.)

Historical Circumstances
Many firms have a unique historical experience that gives them an
advantage over firms without such experience.

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Example: Southwest Airlines

Southwest Airlines spent decades operating in the unregulated and
very competitive intra-state (Texas) airline market. It developed a very
effective business model. Other firms have seen what Southwest has
done and have tried to copy it, but they lack the experience that
Southwest gained in Texas. In fact, most airlines have spent most of their
corporate existence in heavily regulated air markets. Southwests
experience gives it an advantage that the competitors find hard to
duplicate, thus creating a barrier to entry. (Notice that this barrier could
also be classified as a barrier resulting from learning by doing. In other
words, Southwest has had considerable opportunity to learn from its onthe-job experience in serving competitive markets. It really does not matter
how we classify this advantage - the key is appreciating how this gives
Southwest a barrier that other carriers find hard to match, at least for
now.)

Large Capital Costs or Large Expenditures as Barriers to Entry:

Automobiles
Large capital requirements and the expenses associated with large
scale enterprise were listed in the text as potential barriers to entry. No
examples were given; however, the automobile industry provides three
good illustrations.

1. Automobile assembly plants are very capital intensive. For example,

Honda spent more than $3 billion on its Marysville, Ohio assembly plant
and Toyota spent $8 billion on its Georgetown, Kentucky production plant.
Any potential competitor would have to be willing and able to incur similar
expenses upon entering the industry. This creates a formidable barrier to
entry.
Recent developments in the Bay Area with NUMI Motors offer two
interesting twists on this point. First, NUMI was a joint venture between
Toyota and General Motors to assemble cars and trucks in Fremont, CA.
General Motors pulled out of the joint venture as it entered bankruptcy in
the spring of 2009. Toyota is currently weighing its options but press
reports seem to indicate that Toyota is leaning toward closing the facility.
But if auto plants are so expensive to create, will this have a
significant impact on Toyotas decision? The answer is certainly yes, but

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the real question may be how much? The NUMI plant is a large operation
and while its construction costs may be largely sunken costs, the cost of
another plant to replace it in the future are certainly relevant and an
important consideration. Unfortunately for NUMI, Toyota, like GM, may
need to make its decision in the context of excess capacity and the need
to reduce output in the current weak auto market.
Second, Tesla Motors, a start-up maker of electric cars, announced
last year that its plans for building an assembly plant in the San Jose area
were thwarted by the availability of facilities large enough to accommodate
its operations. Of course, the availability of space is entirely a matter of
cost (you can always tear down existing structures if you have sufficient
funds). But might NUMIs problem be Teslas opportunity? If NUMI is a
candidate for Tesla, then the current economic crisis and the demise of
the joint venture should be seen as reducing a significant barrier to entry.
2. Selling automobiles requires a major commitment to advertising. General
Motors spent more than $4 billion on advertising in 2005 and Ford and
Chrysler are always among the top 10 leading advertisers. Again, any
potential entrant into the market must be prepared to match these
expenditures.
3. Selling trucks and autos requires a massive dealer network. In 2005,
General Motors, Ford, and Chrysler sold their cars and trucks through
15,000 dealers. As part of their bankruptcies, both GM and Chrysler have
sought to pare down the size of their dealer networks, but this is a
relatively marginal adjustment and does not negate the barrier created by
the need for a new comer to create a deal network. Most importantly, a
new entrant into the auto industry would have to incur substantial costs in
establishing a dealer network, including the costs of
supporting/subsidizing new dealers in the formative years of the new
venture. The importance of the dealer network and the problems
encountered in creating one can clearly be seen in the failure of Kaiser to
enter the market in the 1950s (see the text).
(Part of this section was based on information from: James Brock, ed., The Structure of
American Industry (Upper Saddle River, NJ: Pearson Prentice Hall, 2009): 166)

One More Time: Asset Specificity

As noted earlier in the discussion of acquisition costs in Chapter 1,
asset specificity may be just as important as the size of the capital outlay

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in creating a barrier to entry. There is no need to repeat the earlier here,

but the discussion above of capital cost ought to be re-read with asset
specificity in mind. Specific assets require a large capital commitment
from a would-be entrant and can thus create a very significant barrier to
entry.

Barriers to Entry in the Airlines

Major airlines enjoy a number of barriers to entry:

1. At the nations largest and busiest airports (e.g., Chicagos OHare,

Washingtons National, New Yorks La Guardia and Kennedy airports),
airlines need government slots or permits for landing and departing at
particular times. The major airlines hold most of the time slots, especially
most of the favorable time slots. For example, in 2001, American Airlines
and United Airlines held 90 percent of the time slots at Chicagos OHare
airport. At Washingtons National airport, American, United, Delta,
Northwest, and US Airways held 98 percent of the landing and take-off
slots. A new competitor would either be exclude from these airports, or
would have to purchase slots from existing carriers at exorbitant prices. If
you look at Southwest Airline, note that they seldom fly to these main
airports.
2. The major legacy airlines are further able to exclude new competitors by
having already locked up the prime gates and ticketing facilities at major
airlines. The U.S. General Accounting Office conducted an extensive
study of airport operations and found that the major air carriers held 94
percent of the gates at major airports, with 86 percent of these leased on
an exclusive-use basis. Major airline carriers can keep new competitors
out by simply refusing to lease gate space, or by charging exorbitant rates
for gate space. Again, note that Southwest Airline seldom flies to these
major airports; it finds alternative airports in the vicinity.
3. The major airlines have developed extensive ticket and reservation
systems that generally excluded discount carriers. Even if discount
carriers are include in the systems, these reservation systems often
include incentives and bonuses to reservationists and travel agents that
give them an incentive to book passengers on the major carriers. As such,
these reservation systems can create a barrier to entry. However, note
that this would only be a barrier if the discount carriers were excluded and
could not provide a reservation system that was comparable.
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I am not an expert on airline reservation systems, but I have used

Southwests reservation system extensively and I have tried to use United,
American, and Lufthansas reservation systems; from my experience,
Southwest is infinitely easier to use and more user friendly. If my
experience is typical, the major airlines have the potential for a barrier to
entry with their reservation system that is largely unrealized.
4. The major airlines contend that their size allows them to reap economies
of scale, especially through hub-and-spoke networks. This will be
discussed in the text for a later assignment. Suffice it here to note that
economies of scale, unlike the factors discussed above, are a function of
size and volume.

When Barriers Clash: Airlines

Notice that we can identify barriers to entry enjoyed by the major
airline carriers as well as barriers to entry enjoyed by discount carriers
such as Southwest Air (see the text). Recall that barriers are advantages
that the competition cannot readily obtain. Our question here is simple and
to the point: while the major airlines enjoy barriers and Southwest Airlines
enjoys barriers, which barriers or advantages are more important?
It would be unwise to seek a simple blanket answer to this question
(e.g., it may depend on macroeconomic conditions), but some
observations on this question are in order.
It appears that the race to date has gone to Southwest Airlines and
other discount carriers. Discount carriers seem to enjoy significantly lower
costs compared to their major airline rivals. For example, in 2004, low-cost
airlines enjoyed a 37.5% per seat mile cost advantage over legacy carriers
(i.e., the established major airline carriers). While there are many reasons
for this advantage, one study attributes as much as two-thirds of the cost
advantage to a variety of more efficient business practices that have been
sharpened in the competitive markets that discount carriers grew up in.
The important point here is to note that the size of the large legacy carriers
and any economies of scale or barriers to entry that they might enjoy,
seem to be insufficient to overcome the greater competitiveness of their
smaller rivals. As such, the barriers created by the major airlines do not
seem up to the task of keeping rivals out.
(Part of this section was based on information from: James Brock, ed., The Structure of
American Industry (Upper Saddle River, NJ: Pearson Prentice Hall, 2009): 246-250)

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Combination Effects
Many of the factors cited above are often found in combination with
one another and in combination with other factors. These combinations
are often much more potent than the sum of their parts. For example,
combining product differentiation with significant economies of scale can
be formidable. In the automobile industry, a new producer must create a
line of vehicles, not a single vehicle. It must also acquire sufficient volume
to enable it to be an efficient producer of engines, bodies, and other
component parts. After creating a full model line, it must be prepared to
change its models annually. In addition, it must have sufficient volume
and a full product line that can sustain a dealership network. This is a very
formidable barrier. For example, the last serious attempt by an American
firm to enter the American automobile industry was made by Kaiser
Automotive in the early 1950s. Kaiser found it impossible to acquire
sufficient volume to be efficient, to change its models annually, or to
create a dealer network. Its last attempt at solving the dealer network
problem was to try to sell its cars through Sears Department stores. But
while Americans may have bought tools and refrigerators at Sears, they
didnt buy cars there. Kaiser failed in the car business.

Economies of scale combined with Inelastic Demand

This can be a powerful barrier to entry. Significant economies of
scale mean that the new firm must immediately acquire significant volume
in order to be cost efficient. But how does it get this volume? Offering
products at a price discount is one way of acquiring volume, but price
inelasticity means that customers are not price sensitive. It also means
that the price discounts needed to attract large numbers of customers
away from established producers will have to be very large. As a rule of
thumb: The bigger the economy of scale and the lower the elasticity of
demand, the greater the barrier.

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Case Study: A Brief History of the Barbie Doll

In the mid-1950s, Elliot and Ruth Handler co-founded Mattel, Inc in
Hawthorne, CA. The company was successful but not noteworthy until Ruth
Handler created the Barbie doll. She named the doll after their daughter, Barbie,
and named Barbies boyfriend after their son, Ken. Ruth Handler got the idea for
Barbie while on a trip to Europe in 1957 after acquiring three smutty Lilli dolls.
The Lilli dolls were modeled after a rather risqu German comic strip character.
Lilli was not a baby doll like most other dolls on the market in the 1950s. As Ruth
Handler put it, Lilli looked like a streetwalker with a well developed, curvaceous
body, a tiny waistline, and a wardrobe of skimpy, tight clothes. After watching her
daughter Barbie play with adult paper dolls, Ruth Handler decided to create a doll
that would project every little girls dream of the future. Ruth argued that it was
just as important for girls to imagine what they might grow up to become as it
was for them to role play what it would be like to care for babies. In 1958, Mattel
bought the rights to the Lilli doll.
Following the Lilli prototype, Barbie was given a voluptuous figure that
sparked controversy from the beginning. On a human scale, her measurements
translated into 39-21-33. Despite negative responses from mothers in an early
marketing study, and amidst doubts from other Mattel executives, Mattel dutifully
carried out the request from the companys founders and put Barbie on the
market. Barbie made her debut at the American Toy Fair in New York City in
1959. In Barbies first year, Mattel sold 351,000 Barbie dolls at $3 per doll.
Thanks to Barbie, Mattel set a new sales record, the first of many sales records
to come.
The first Barbie doll featured black eyeliner, pearl hoop earrings, a zebra
striped bathing suit and stiletto heels. All the original clothes were hand sewn.
Other original clothes for Barbies wardrobe included a casual outfit for football
games, a tennis dress, a bridal gown, and a ballerina tutu. Through the years, a
fashionable wardrobe and accessories have remained key features of the Barbie
franchise. Many outfits have been created by world famous designers such as
Oscar de la Renta, Yves Saint Laurent, Christian Dior, Valentino, Perry Ellis, Bob
Mackie, Givenchy, Versace, Dolce & Gabana, Vera Wang, and Gucci. Mattel
also employs in-house designers who create hundreds of new outfits for Barbie
each year. Over 105 million yards of fabric have reportedly been used to produce
Barbies clothes since 1959, making Mattel one of the largest apparel
manufacturers in the world.
In 1961, Barbies hard-look was softened with blue eyes, curved eyebrows
and a Jackie Kennedy hairstyle. Soon to follow were Mod Barbie, Sun Lovin
Malibu Barbie, Aerobics Barbie, Yuppie Barbie, Astronaut Barbie, Dr. Barbie,
Karaoke Barbie, etc. Ken was introduced in 1961 as Barbies handsome steady
(with non-removable shorts). Barbies best friend, Midge, was introduced in 1963.
In 1968, the first Black Barbie, Christie, was brought to market.

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Barbie herself underwent more changes. In 1965, bendable legs were

introduced. As Barbie evolved over the years, she has appeared as a doctor,
dentist, astronaut, firefighter, paleontologist, businesswoman, police officer,
Olympic athlete, and Presidential candidate.
The success of the Barbie doll led Mattel to become a publicly owned
company in 1960. In 1963, Barbie dolls and accessories were test-marketed
overseas. Results were so favorable that licensing agreements were established
in England, France, Germany, South Africa, Italy and Mexico. Within five years,
Mattel joined the ranks of companies on the list of Fortune 500 companies.
Barbie has become the most successful and enduring toy franchise in history.
Ninety percent of all American girls in the last forty years have owned at least
one Barbie. Today, the typical American girl between the ages of 3 and 11 owns
an average of 10 Barbie dolls; in Italy, France and Germany, the typical collection
is 5 Barbie dolls.
According to Mattel, over one billion Barbie dolls (and family members)
have been sold since 1959 in more than 140 countries. Mattel sells over 1.5
million dolls each week (215,286 dolls per day, or 2.5 dolls per second). If every
Barbie doll ever manufactured were laid end to end, they would circle the earth
more than seven times! Barbie is the best-selling fashion doll in almost every
global market, with worldwide annual sales of $1.5 billion. The best selling Barbie
doll, Totally Hair Barbie, was introduced in 1992. This Barbie had hair from the
top of her head to her toes, and sold more than 10 million units, generating
worldwide sales of $100 million dollars.
Barbie and company have their critics. While Barbie is clearly appealing to
girls and doll buyers, her proportions are clearly unrealistic. Critic Betsy Gallup
(Gallup, Betsy. Poor Barbie. http://www.christian-mommies.com/ages/tweensand-teenagers/poor-barbie/) has determined that If Barbie were a real person,
she would be 6' 0", weigh 100 lbs., and wear a size 4. Her measurements would
be 39" - 19" - 33" (Gallup, 1) (As a point of reference, the circumference of my
head is 22 inches. Ouch!) Compare Barbie to the average woman who stands
54, weighs 145 lbs., wears between a size 11 and 14, and has measurements
of approximately 36 - 30 - 41 (Gallup, 1). Clearly, Barbie is not average, and it
is easy to see why so many people argue that Barbie is such a poor and
dangerous role model for young girls. (If this seems like a sexist discussion, take
comfort in the fact that Ken has bigger problems in the anatomical department no wonder she dumped him.)
Through the years, many financial analysts have viewed Mattel as a onetrick pony act (that is, too dependent on Barbie alone). On April 16, 2005, Mattel
announced disappointing earnings brought about by a 25 percent decline in
quarterly sales of Barbie, raising the old concerns again. It is too early to tell
whether middle age has finally caught up with Barbie, but one should not write off
the franchise too quickly. In June, 2005, Mattel announced plans for a Barbie
movie (the trick is going to be finding the lady to match the doll) and a line of
clothes for girls.

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Mattel certainly has a track record that is hard to bet against. More
importantly, Mattel has devised a strategy of continuous product differentiation as
a barrier to keeping would-be competitors out of its market. By continuously
offering Barbie in different outfits, themes, and with companions, Mattel has
managed to create a moving target that is hard for competitors to copy or
replicate. From 1958 through 2004, Barbie underwent more than 175 major
changes and additions. Mattel certainly knows how to keep the line fresh and the
competition at bay.

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