How does the degree of product differentiation affect the competition from new entrants?

The degree of product differentiation significantly impacts competition from new entrants by establishing brand loyalty. When a product is highly differentiated, it often means that consumers perceive it as distinct or superior compared to alternatives available in the market. This uniqueness can lead to strong brand loyalty, wherein consumers are less likely to switch to new entrants.

As established brands cultivate a loyal customer base, new competitors face a significant barrier to entry. They need to offer something uniquely appealing or significantly lower prices to attract customers away from trusted brands. This creates a less competitive environment for new entrants, as the established brands can leverage their loyal following to maintain market share and profitability.

Thus, the presence of strong brand loyalty serves to cushion established companies from the threat posed by new entrants, effectively reducing competition within the market.