VOLUME 3 NUMBER 3
1994
Advertising, Barriers to Entry
and Competition Policy
Christopher Pass, Brian Sturgess and Nicholas Wilson
Introduction
The controversy as to whether or not
advertising impairs the efficient functioning
of markets because it can act as a “barrier” to
new firms entering a market has once again
attracted the interest of the UK competition
authorities. In this article we look at the
advertising-barrier to entry issue as seen in a
number of Monopolies and Mergers
Commission investigations. Our contention is
that not only must the conventional negative
view of advertising be tempered by the
positive role played by advertising in
facilitating actual entry, but also that insofar
as there are a number of other factors which
may inhibit or prevent market entry, it is
necessary to look at this issue “in the round”
rather than from one narrow perspective.
Market Entry: General Considerations
In order to enter a market successfully and
sustain its position over time, a firm must
usually possess some form of competitive
advantage over rival suppliers. According to
Porter (1985) competitive advantage is based
on two main factors: low costs and product
differentiation. Low costs derive from the
exploitation of economies of scale, learning
effects, and the generation of process
Journal of Product & Brand Management, Vol. 3 No. 3, 1994, pp. 51-58
© MCB University Press, 1061-0421
51
invention and innovation. Product
differentiation advantages derive from the
ability of a firm to offer customers products
which are more distinctive/“better than”
competing products, enabling it to establish
brand loyalty. The sources of differentiation
are manifold ranging from variations in the
product itself, “imputed qualities” of the
product imparted by advertising “messages”,
distribution methods and after-sales service
facilities. Product innovation is a key aspect
of sustaining product differentiation
advantages over time.
In practice, there are various obstacles in
the way of firms attempting to enter a market
(see George et al., 1992 for a detailed
review): the minimum efficient scale of
operation may require entry on a large scale,
otherwise entrants would be put at a relative
cost disadvantage; however, the size of the
market might be too small to support another
major supplier; entrants may be put at a cost
disadvantage because they are unable to
access best state-of-the-art process
technology if this is patented by established
firms; entrants with “unknown” and “untried”
The present writers were commissioned by the
Office of Fair Trading (OFT) in 1993 to examine
this issue in depth. A report, “Advertising As An
Entry Barrier: A Survey of the Theoretical and
Empirical Evidence” was submitted to the OFT
in 1994.
 JOURNAL OF
PRODUCT & BRAND
MANAGEMENT
products may be unable to win a viable share
of the market because of customer loyalty to
existing brands built-up by established firms
through cumulative investment in product
differentiation; key raw materials,
component sources or distribution channels
may be controlled by established firms,
thereby limiting access to inputs or market
outlets; finally, the cost of financing
investment in plant and product
differentiation, and meeting initial operating
losses may be prohibitively high. Some of
these barriers may be created deliberately by
established firms to forestall entry (for
example, the “tying” of distribution channels
through exclusive dealing contracts);
additionally, the anticipation of aggressive
retaliation by established firms to actual
entry may well deter potential newcomers
from going ahead.
One or some combination thereof of the
above factors may pose particular problems
for a small scale “greenfield” type of entrant.
However, these factors are often of less
significance to “deep pocket” entrants,
particularly established large conglomerate
entrants who may choose to effect entry by
merger with, or takeover of, an established
firm.
Moreover, the conventional view of the
potency of barriers to entry can be criticized
for being too myopic because it
ignores/underestimates the dynamics of
market competition. Firms’ cost-structures
can change as a result of new techniques,
product innovation can result in firms
offering new and improved products and
changes in the level and pattern of demand
provide an on-going fluid marketplace. Thus,
unless established firms are cost-effective,
active innovators and sensitive to changing
demand opportunities for entry may arise.
Here indeed is the crux of the matter. In
dynamic terms, certain factors (technology,
differentiation, etc.) which appear in static
52
market theory as barriers to entry now
become variables which can be exploited as a
means of achieving successful entry.
Advertising is a case in point. On the one
hand, as emphasized by traditional theory it
may in certain circumstances act as a barrier
to entry; but, on the other hand, advertising
can be shown to play a fundamental role in
supporting and underpinning actual entry –
advertising is an essential factor in launching,
building and maintaining demand for the
products of new entrants.
The Monopolies and Mergers
Commission and Advertising as a
Barrier to Entry
The contrasting roles of advertising as a
“barrier to entry” and as an “entry facilitator”
is exemplified in the Commission’s reports on
Household Detergents (1966) and
Stockbrokers’ Services (1976). These cases
together with a number of other market
situations involving advertising (or lack of it),
are reviewed further.
Advertising as a Barrier to Entry
In Household Detergents (1966) the industry
was dominated by two suppliers: Unilever
with a market share of around 45 per cent
and Proctor & Gamble (P&G) with a market
share of around 43 per cent. Overall market
demand for detergents had remained fairly
static. Actual competitors at this time
included Palmolive, The Co-operative
Wholesale Society(CWS), and “own label”
retailers. Potential competitors included
Shell and Marchon, suppliers of “active
ingredients” to Unilever and P&G who
might be tempted to integrate forward into
the retail market.
Unilever pioneered the introduction of soap
powders in the UK in the early 1900s and by
 VOLUME 3 NUMBER 3
1994
the use of branding (Persil, Rinso etc) heavy
advertising and mergers it had built up a
market share of some 60 per cent by 1930.
P&G (a US company) entered the UK market
in 1930 by the takeover of T. Hedley, a
smaller competitor to Unilever which was in
financial difficulties. P&G introduced Oxydol
soap powder (its US brand) and by aggressive
marketing gained a 15 per cent market share
by 1938. A closer balance between Unilever
and P&G developed in the early 1950s with
the introduction by P&G in 1950 of the
innovatory synthetic powder, Tide (the
product was launched in the USA in 1946).
Unilever’s response may have been delayed
by wartime reductions in detergents research
and it did not introduce a comparable
synthetic powder (Surf) until 1952.
n (in turn, protected by the entry-deterring
Promotional costs in
the industry had
escalated
n sustain a high level of demand for their
The detergents industry was and is highly
advertising/promotional intensive. Peak
spending is associated with new product
launches and millions of pounds are spent
yearly on the “competitive maintenance” of
existing brands. In 1964, Unilever spent a
total of £8.3 million on advertising and sales
promotion (of which £4 million was media
advertising); P&G’s advertising and sales
promotion outlay was £8.7 million in 1984
(including £3.8 million on media advertising).
In terms of the average retail price of a
standard pack of detergent advertising and
sales promotion accounted for around 23 per
cent of product price for both companies.
Promotional costs in the industry had
escalated since the 1950s and Unilever and
P&G had on occasions felt pre-disposed
towards controlling them. An agreement
53
between the two companies was entered into
in 1962 which stipulated that promotional
expenditure for the period 1.4.62 to 21.3.63
should be limited to about 50 per cent of the
amount spent in the period 1.7.60 to 30.6.61
This agreement, however, was not renewed.
The Monopolies Commission condemned
as operating against the public interest two
aspects of the industry’s conduct and
performance.
(1) the emphasis on advertising and sales
promotion competition, which the
Commission concluded had resulted in
“excessive” selling costs, increased prices
and the creation of a powerful barrier to
entry;
(2) the lack of price competition which it
concluded had resulted in “excess” profits
effects of advertising and sales
promotion).
The companies claimed that promotional
spending in general was necessary in order to
products, and this helped them to achieve
economies of scale in production and
distribution and had kept retailer’s margins at
relatively low levels. They did not believe
their promotional spending was “excessive”:
the existence of potential competitors sets a
limit on this in that “if their costs were too
high others would come into the market to
sell at lower cost and lower prices”
(paragraph 98a) The companies rejected the
claim that promotional spending per se acted
as a major barrier to entry: “New entrants
could minimise their costs by entering the
market on a regional basis; or multiple stores
could have their own brands of powders made
up for them, as some of them already do with
liquid detergent” (i.e. washing-up liquids,
paragraph 98(b)) The core of their case was
that new entrants are deterred, not by the
necessary outlay on advertising and
 JOURNAL OF
PRODUCT & BRAND
MANAGEMENT
promotion, but by their inability to match the
skills of Unilever and P&G in identifying and
meeting consumer demand through their
existing products and through new product
innovation.
The Commission remained unimpressed by
these submissions: “To a considerable extent
the companies’ arguments hinge upon the
assertion that the existence of potential
competitors must restrain both companies
from undertaking wasteful expenditure. We
might have been more impressed by this
assertion if it were apparent that this factor
was holding down prices, since this would
confirm that there was an active incentive to
minimise costs” (paragraph 103). In the
Commission’s view this was not the case:
profit rates for both companies were high, the
companies were not under any great pressure
to minimize costs and were able to pass on
cost increases to consumers by raising prices.
The high profitability of the companies had in
fact been “protected” by advertising and sales
promotion. The Commission concluded: “It is
difficult to see any reason, other than that the
terms of entry are too onerous, why this
profitable field should, with the exception of
liquid detergents, have been left largely in the
hands of the two companies. Some of the
more obvious potential competitors, such as
large chemical manufacturers, are probably
not deterred by the mere size of the initial
investment required, but they may well feel
reluctant to participate in – and by
participating, perhaps, to intensify — the
process of competition in promotion
expenditure which appears to prevail in the
industry” (paragraph 104). The Commission
recognized the possibility that “own label”
retailers might provide (eventually) a
powerful antidote but commented “we are
indeed a little surprised that multiple stores
which market their own brands of liquid
detergents do not as a rule market their own
brands of powders” (paragraph 104). The
54
Commission concluded: “we think that the
expenditures incurred (on advertising and
promotion) are unnecessarily high and that
one effect is to keep entrants out of the
market” (paragraph 105). To reduce price and
profit levels in the industry the Commission
recommended price cuts and “at least a 40 per
cent reduction in selling expenses”
(paragraph 127).
Advertising as an Entry Facilitator
In a number of cases the Commission has
explicitly recognized the pro-competitive role
of advertising. Since 1970 the Commission
has investigated restrictions on advertising in
various professional services including
stockbrokers, accountants, advocates,
barristers, medical practitioners, osteopaths,
civil engineering consultants. The
Commission’s general conclusion in these
cases was that while the restrictions on
advertising laid down by the professions’
ruling trade bodies were designed to protect
customers and users their effects had been to
limit competition between established firms
and practitioners and impeded the entry of
new firms and practitioners.
In Stockbrokers’ Services (1976) the
Commission found that members of the Stock
Exchange were required to observe various
rules and regulations, including advertising.
Stockbrokers were prevented from using
certain media (television and radio), while
limitations were placed on other forms of
advertising (press advertising and circulars
issued to clients). Prior consent of the Stock
Exchange Council was required to “clear”
advertisements; prior consent to an
advertisement was given subject to fulfilling
certain conditions. A fundamental condition
was that it did not advertise individual
securities. In addition, advertisements were
required to be made in good faith, must not
confuse, mislead or offend, must be capable
 VOLUME 3 NUMBER 3
1994
of substantiation, must not attack or discredit
other firms and institutions directly or by
implication.
n Medical Practitioners’ Services (1989) the
Prevailing restrictions
acted as a clog
on competition
n
Collectively these restrictions were designed
to protect the interests of clients. The
Commission agreed that there was a case for
continuing to protect investors from
untruthful and misleading advertisements but
that this could be done within the framework
of a more liberal regime towards advertising.
The Commission’s view was that the
prevailing restrictions were over protective
and acted as a clog on competition: “these
restrictions as a whole place strict limits upon
the use of advertising as a form of
competition to obtain business. It can hardly
be denied that the use, if they were available,
of the forbidden kinds of advertising as a
form of competition could be expected to
result in some shift of business from one
stockbroker to another” (paragraph 88). The
restrictions had resulted in users being
deprived of helpful information and had
served to reduce the stimulus to efficiency,
cost-saving and innovation which would
otherwise have prevailed in a more open,
competitive situation.
The Commission concluded: “they deprive
the more efficient firms of something which
might help them to expand at the expense of
the less efficient, and that, by depriving new
entrants and firms which wish to introduce
new methods or new kinds of service of some
part of their means of attracting demand, they
discourage both new entry and innovation”
(paragraph 115).
55
Similar sentiments were expressed by the
Commission concerning restrictions on
advertising in Medical Practitioners’ Services
(1989) and Osteopaths’ Services (1989). In
Commission concluded that the General
Medical Council (GMC) limitations on
advertising constituted a material restriction
of competition and recommended that general
practitioners should be free to advertise
subject to certain constraints.
The Commission noted US studies of the
impact of the relaxation of advertising rules
in various American professions indicating
that competition had increased leading to cost
savings and lower prices and improvement in
quality of service.
In Osteopaths’ Services (1989) the
Commission concluded that advertising
restrictions had “specific effects adverse to
the public interest in that they inhibit the
establishment and development of practices
and, by limiting the information available to
the consumer, hinder both patients and
medical practitioners in making an informed
choice of osteopath. We also consider that the
restrictions on advertising limits public
awareness of the profession and thereby
limits both the development of demand for
osteopathy and the rate at which the
profession could expand” (paragraph 7.34).
Advertising and Other Entry Barriers
It is important that the effects of advertising
be looked at alongside other factors in the
competitive equation as emphasis on
advertising alone may lead to an over/under-
estimation of the potency of competitive
forces operating in a market. This, in part, is
acknowledged by the Commission. In
Breakfast Cereals (1973) the Commission
was sceptical of Kellogg’s claim that the need
to incur heavy advertising and promotion
costs and production and marketing expertise
 JOURNAL OF
PRODUCT & BRAND
MANAGEMENT
were not effective barriers to entry since
there were numerous companies
(particularly certain large companies already
established in adjacent food markets) which
either had or could readily acquire the
resources and expertise necessary: “we
accept that this may be so, but it does not
follow that such companies are necessarily
willing to enter the breakfast cereal market”
and while a newcomer may enter the market
by means of retailers’ own brands as in fact
one company (Viota) had done “the present
size of Kellogg (55 per cent market share)
and the consequent advantages in marketing
which it enjoys tend to increase the
difficulty of new entry and to enable Kellogg
to contain the competition from retailers’
own brands by means of advertising and
promotion” (paragraph 81). However, the
Commission was forced to concede that it
perhaps was not advertising per se that
represented the major obstacle to entry but
the need for entrants to come up with
innovative new products rather than “me-
too” copycats: “given the cost of advertising
and promotion and the risks involved,
companies would generally be unlikely to
attempt to market (except as a retailer’s own
brand) a copy of an existing product. This
means that a potential new entrant probably
needs to find an acceptable new product”
(paragraph 88).
A similar perspective of the entry issue
was taken by the Commission in its recent
Soluble Coffee report (1991). Nestlé
(“Nescafé”, etc.), the pioneer of instant
coffee in the UK, held a 47 per cent market
share in 1989 and had successfully
maintained its market leadership in face of
strong new entry competition from General
Foods (“Maxwell House”, etc. – 18 per cent
market share), Brooke Bond (“Red
Mountain”, etc. – 6 per cent market share)
and a multitude of “own label” brands
(combined 24 per cent market share). Nestlé
56
was commended by the Commission for its
superior efficiency and innovativeness in a
highly competitive marketplace. It was these
factors which underpinned its strong market
position and made entry more difficult.
“Nestlé has indeed increased its market
share at the expense of own label by offering
higher quality and better value for money,
despite higher prices. The increasing success
of its brands, particularly of Nescafé, given
the extent of choice available (over 200
brands, most selling at prices below those of
Nescafé brands) reflects Nestlé’s success as
a competitor in offering a reliable product at
a quality and price in accordance with
consumers preferences” (paragraph 7.66).
n
Product uniqueness
is a critical
factor
n
While it cannot be denied that advertising
costs (national launches typically cost
upwards of £5 million) might act as some
deterrent to entry, a more formidable
obstacle is represented by the need to offer
innovative products. Both the entry of
General Foods and Brooke Bond into the
mass market (other entrants have chosen
limited market niches) were facilitated by
the “deep pocket” ability to finance initial
entry expenses, including advertising.
However, their subsequent failure to
undermine Nestlé’s market position despite
higher advertising-sales ratios indicates that
it is product quality and consumers’
perceptions of the “value for money”
provided by a brand which represents the
core competitive advantage in this market.
 VOLUME 3 NUMBER 3
1994
By the same token, the removal of various
restrictions on advertising as recommended
in the professional services cases cannot be
expected to open the floodgates to new entry,
as the Commission itself conceded. For
example, in the case of Medical Practitioners
(1989), a key barrier to entry is the need to
obtain professional qualifications and a
“licence” to practice from the GMC. Most
general practitioners (GPs) establish
themselves as GPs in the National Health
Service (NHS) after holding assistant posts
either by joining an existing practice or, less
frequently, by taking over a vacant practice.
Very few GPs are in a position to set up a new
practice: “In these circumstances, the
advertising restrictions are likely to have little
effect on the ability of the vast majority of
NHS practitioners to establish themselves in
practice” (paragraph 8.18). Ergo, removal of
these restrictions is unlikely to bring about
significant new entry. Likewise, in the case
of Stockbrokers’ Services (1976) the
Commission noted: “With regard to new
entry to practice as a stockbroker, the number
of firms has been diminishing over the years
and the tendency is for newly admitted
members to join existing firms rather than set
up new firms. We do not think either the past
or present advertising rules have contributed
materially to this situation” (paragraph 120).
Again, the removal of advertising restrictions
was not expected to change the competitive
situation radically.
Conclusion
A key point to emphasize is that the ultimate
“success” of advertising in stimulating
demand cannot be divorced from the intrinsic
qualities and properties of the product itself.
It is these factors which are of crucial
importance in determining customers’
satisfaction with the product and hence their
57
willingness to repeat purchase it. Thus, slick
advertising may induce some buyers to
purchase a produce once, but if the product
fails to live up to expectations because, for
example, its quality or performance is poor,
then existing buyers will defect and adverse
word-of-mouth publicity will further kill off
sales. The same considerations apply in
respect of new product launches.
n
Advertising is
an important adjunct to a
brand’s launch
n
Although conventional economic analysis
suggests that advertising acts as a barrier of
entry, in that entrants with unknown brands
are at a disadvantage compared to established
brands (and entrants are thus forced to spend
more on advertising for each sale gained) the
real barrier to entry to entrants (possessing
adequate financial resources to finance
advertising spend) is the need to come up
with an innovative product. Studies have
shown that successful new brands are
typically “more distinctive/novel/superior” in
comparison to established brands, i.e. product
uniqueness is a critical factor. In this context,
advertising is an important adjunct to a
brand’s launch, serving to act as an “entry
facilitator” by bringing the brand to the
attention of the buying public.
Finally, then it is important to consider the
relative effects of all potential barriers to
entry. While it may well be possible to lower
entry costs by, for example limiting firms
total expenditure on advertising and
promotion (as recommended – but not
implemented – in the house detergent case),
significant entry may still fail to materialize if
other structure-conduct variables remain
unfavorable.
 JOURNAL OF
PRODUCT & BRAND
MANAGEMENT

References Soluble Coffee (1991), Monopolies and

Mergers Commission, HMSO, London.
Breakfast Cereals (1973), Monopolies
Commission, HMSO, London. Stockbrokers’ Services (1976), Monopolies and
Mergers Commission, HMSO, London.
George, K.D., Joll, C. and Lynk, E.L. (1992),
Industrial Organization, Routledge, London.
Household Detergents (1966), Monopolies
Commission, HMSO, London.
Medical Practitioners’ Services (1989), Christopher Pass is a Lecturer in Managerial
Monopolies and Mergers Commission,
Economics, and Nicholas Wilson is a
HMSO, London.
Professor of Credit Management, both at the
Osteopaths’ Services (1989), Monopolies and Management Centre, University of Bradford,
Mergers Commission, HMSO, London. Bradford, UK. Brian Sturgess is a Consultant
Porter, M.E. (1985), Competitive Advantage, with Baring Bros, based in London, UK.
Free Press, New York, NY.

58