Why is product differentiation an entry barrier?

Product differentiation can act as an effective barrier to entry, customers are often loyal to existing products. This creates additional costs for new companies. There are high sunk costs for new businesses, for example to advertise themselves. There may be economies of scale to existing companies in advertising. Product differentiation may for example arise from: • Research and patents - new, improved, differentiated products • Service (pre- & post-sale) • Advertising, creating a brand (necessary to be constantly on top) • First mover advantage: The company had time to build up an effective customerbase