| Sumario: | This essay has considered a general distributed lag model of the dynamic demand functions facing established firms and potential entrants in a situation in which advertising is the only competitive weapon. This structure is compatible with empirical studies of consumer response to advertising, and it also seems compatible with the notion that advertising creates brand loyalty and buyer inertia. <BR> In the context of this model, we showed that even though established firms have built up loyalty to their brands or sell to inert customers, this does not generally give them any advantage which can be used to deter entry. Only if capital markets are seriously imperfect and potential entrants lack valuable assets to use as collateral might the market position of the established firms hinder entry. <BR> We then argued that if potential entrants can produce and promote as efficiently as established firms, there is no presumption that demand functions differ to enable the latter to deter entry. Further, we showed that even if potential entrants behave in a naive fashion, it may not be optimal or even plausible for the established firms to spend enough on advertising to deter their entry--even if there is an asymmetry in demand conditions which favors the established firms.
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