How can product differentiation affect barriers to entry?

Product differentiation significantly impacts barriers to entry by increasing the cost of entry for prospective entrants. When established companies in a market successfully differentiate their products, they create unique features, branding, or customer experiences that are appealing to consumers. This differentiation can lead to customer loyalty, making it difficult for newcomers to attract customers away from established brands.

New entrants must invest considerably in research and development to create competitive products and in marketing to build brand recognition and loyalty. Additionally, if existing products are perceived as superior due to differentiation, newcomers face higher costs in not only developing unique offerings but also promoting them effectively. This heightened competition leads to increased costs, which can deter potential entrants from entering the market.

The other options do not reflect the true impact of product differentiation on barriers to entry. For instance, it does not simplify market entry; in fact, it does the opposite by adding complexity and resource requirements. Furthermore, it does not ensure that all companies compete equally because differentiated products create a skewed competitive landscape. Lastly, while some aspects of differentiation can lead to reduced marketing needs for established companies, new entrants will still face significant marketing costs to establish their presence in a saturated market.