Question 8: Evaluate the level of contestability in the fragrance industry.
Introduction
Contestability refers to how easily firms can enter and exit an industry, even if the market is
concentrated. A perfectly contestable market is one where barriers to entry and exit are low,
ensuring firmss behave competitively. In 2023, Bytedance, owner of TikTok, entered the
fragrance market with its new brand Emotif, following earlier diversification into food and
drink. The fragrance industry is traditionally dominated by big firms like LVMH and Estée
Lauder, raising questions about whether this sector is truly open to new entrants or protected
by structural advantages.
Paragraph 1: Evidence of Some Contestability – New Entrants Disrupting Traditional
Brands
The fragrance industry shows signs of partial contestability → the emergence of new digital-
native brands (e.g., Glossier You, Byredo, and now Emotif) proves that new players can enter
and attract consumers, especially among younger demographics → lower production costs:
fragrance manufacturing is relatively cheap compared to branding and marketing, reducing
technical entry barriers → outsourcing production to third-party manufacturers reduces
capital requirements → rise of e-commerce and influencer marketing (especially via
platforms like TikTok) reduces reliance on traditional retail channels → Bytedance can
leverage its social media dominance to market Emotif directly to millions without traditional
advertising costs → lowers sunk costs and levels the playing field → these factors suggest
barriers to entry have fallen, making the industry more contestable than in the past.
(Diagram: Normal profit equilibrium – potential entrants keep firms pricing
competitively even without actual entry.)
Paragraph 2: Evaluation – Strong Brand Loyalty and Advertising Barriers Remain
However, contestability is limited by intangible barriers → firms brands enjoy enormous
brand loyalty, cultivated over decades (e.g., Chanel No.5, Dior Sauvage) → consumers
perceive established brands as status symbols or heritage products, making switching less
likely → also, marketing expenditure is huge; leading brands spend heavily on celebrity
endorsements and prime retail placement → raises sunk costs for entrants who must invest
heavily to build brand recognition → additionally, access to premium distribution channels
(department stores, luxury boutiques) is limited → retailers favour brands with proven sales
records → this creates strategic barriers that deter small entrants → thus, while entry is
technically possible, effective competitive threat is much weaker, reducing real contestability.
Paragraph 3: Role of Technology and Social Media Reducing Barriers
Digital technology reduces some traditional barriers → platforms like TikTok, Instagram, and
YouTube allow new brands to bypass traditional gatekeepers → viral marketing can build
brand awareness rapidly at low cost (e.g., Emotif promoting via TikTok influencers) →
direct-to-consumer models eliminate retailer dependency → low-cost sampling techniques
(e.g., scent subscription boxes) lower entry costs further → data analytics enable firms to
micro-target consumer niches, improving success rates → social trends (e.g., personalisation,
clean beauty) fragment demand, opening space for niche entrants → thus, modern marketing
tools improve accessibility and reduce sunk costs, enhancing contestability for digitally savvy
firms.
Paragraph 4: Evaluation – Limitations of Technology and Persistence of Concentration
Nevertheless, digital platforms are becoming saturated → intense competition for online
attention raises customer acquisition costs → firms with greater budgets dominate paid
search, ads, and influencer partnerships → network effects (e.g., reviews, recommendations)
reinforce leading brands → even in the digital space, first-mover advantages matter → also,
while new brands can enter, gaining significant market share from firmss remains extremely
difficult → natural concentration persists: a few top brands still capture the majority of global
fragrance sales → therefore, digital marketing increases nominal contestability but does not
fully erode firms dominance.
Paragraph 5: Judgement
In conclusion, the fragrance industry has become more contestable than in the past due to
lower production costs, social media marketing, and direct-to-consumer models. The most
significant gain is the ability of entrants like Bytedance to reach consumers without huge
upfront investment in retail distribution. However, strong brand loyalty, high marketing costs,
and luxury perceptions act as powerful barriers, making it difficult for new brands to scale
significantly. Therefore, the fragrance industry is partially contestable: entry is possible, but
effective competition remains constrained. To truly increase contestability, ongoing changes
in consumer behaviour and marketing technology must continue to erode firmss’ traditional
advantages.
