Final answer:
Product differentiation is an entry barrier because it requires new entrants to invest heavily in branding and marketing to compete against established firms, which can lead to monopolies or limited competition among a few firms.
Step-by-step explanation:
Product differentiation by incumbents acts as an entry barrier because it involves creating a distinct image through advertising and building a brand that new entrants have to compete against. In markets with significant barriers to entry, it is not necessarily true that abnormally high profits will attract new firms, as these barriers may prevent competitors from entering. This can lead to a monopoly or limit competition to a few firms. For example, if a firm has a unique product or service, like a successful restaurant with a unique barbecue sauce, new competitors would find it difficult to imitate and capture some of the market share without significant investment and time to develop their own unique offering. Such differentiation makes it hard for new entrants to lure customers away from established companies even if they could offer similar products or services at competitive pricing.