If the entrant does not want to bargain with distributors, it may try to develop a favorable brand image by advertising directly to the final consumer, counting on the consumer to demand the product from distributors. The cost of cultivating a positive brand image will be largely sink: if unsuccessful, the entrant could hardly expect to sell its goodwill, recover its investment in differentiation, and leave the market.

If the entrant comes in on a vertically integrated basis, most of the investment in distribution facilities will be a fixed cost the rental cost of the distribution facilities will have to be paid no matter how much output moves through them. If the product requires specialized distribution facilities, the investment in these facilities will be sink as well as fixed.

The dominant firm can achieve these effects by making its own investment in distribution in the sink assets that make up a distribution system. But any potential entrant that makes serious inquires into market conditions will know that the dominant firm has made this commitment of sink assets. Such entrants are unlikely to expect the dominant firm to yield market share passively in the face of entry. They are much more likely to expect it to lower its price and defend in position if entry occurs.

This discussion shows that vertical integration will serve not only to raise entrants’ costs but also to increase the chances that entrants will expect a hostile reaction. On all counts, vertical integration discourages entry without reducing output or revenue.