Is the Competitor of my Competitor also my Competitor?

This paper presents several results on multimarket competition. First, whenever a firm faces multimarket competitors that sell goods in markets to which the firm itself has no access, the firm gains a strong incentive to expand production in its own market(s). In the capacity choice model, such a firm builds larger than Cournot capacity and pushes its competitors towards other markets. Consumers always benefit from multimarket competition. In asymmetric market structures, some firms may also benefit from multimarket arrangements, but in symmetric ones, all firms are necessarily harmed by it. Second, the intensification of indirect competition is not necessarily bad for the firm. It may be the case that, the more competitors its competitors have, the higher the firm’s profit. Finally, this model also has a multiproduct interpretation which suggests that a merger of single‐product firms may be beneficial or harmful from a social welfare perspective, depending on whether the new entity will compete with several single‐product firms or another multiproduct one.     

Reference Dependence and Market Competition

This paper examines the implications of consumer reference dependence for market competition. If consumers take some product (e.g., the first product they consider) as the reference point when evaluating others and they exhibit loss aversion, then the more “prominent” firm whose product is taken as the reference point by more consumers will randomize between a high and a low price. We also find that consumer loss aversion in the price dimension intensifies competition while that in the product dimension softens competition. With consumer reference dependence, asymmetric prominence can arise as an equilibrium outcome when firms advertise before engaging in price competition.     

On the relationship between product substitutability and tacit collusion

This paper examines the effect of increased product substitutability on quantity‐setting firms’ ability to sustain tacit collusion in a market. It uses a general demand function and the trigger strategy of Friedman (Friedman JW. 1971. A non‐cooperative equilibrium for supergames. Review of Economic Studies 38: 1–12) to show that while increased product substitutability hinders sustainability of tacit collusion in the case of linear and concave demand functions, it may either hinder or facilitate firms’ ability to sustain tacit collusion in the case of convex demand functions. Thus, this paper adds to the growing view that one must use a case‐by‐case analysis in judging whether firms in more homogenous product markets find it easier or harder to tacitly collude. Copyright © 1999 John Wiley & Sons, Ltd.     

Corporate financial distress: The case of publicly listed firms in an emerging market economy

Occurrences of financial distress (FD) are not readily obvious yet can span several periods. This paper examines episodes of FD using industry‐relative (IR) firm‐/ accounting‐, market‐ and macro‐level information. Mixed logit regressions reveal that firm‐ and market‐based measures, as well as macro‐level variables explain the likelihood of FD in 263 publicly listed non‐banking firms in the Philippines during the period 1995 to 2018. Rates of identification of firms in financial distressed states of close to 69 percent are obtained at a cutoff probability of 0.30 in the model with time‐varying intercept and slope. This study shows the importance of recognizing heterogeneous firm behavior. The ability to more accurately predict the probability of FD and to determine the financial health of firms can help financial institutions in allocating funds and policy makers in predicting crises episodes.     

Investment decisions and managerial compensation design in the presence of product market rivalry

We consider an economy where firms operate in an imperfectly competitive industry and mutually affect each others’ investment opportunities. Each firm is assumed to face a mutually exclusive choice of investing in either a short‐ or a long‐term project. For example, firm i's commitment to a short‐term project cuts into firm j's market in the short‐term but frees‐up firm j's long‐term market, and vice versa. Our results show that, even in the absence of an owner–manager conflict, the owner anticipates the product market rivalry and optimally compensates their managers with short‐ as well as long‐term compensation. Although the optimal compensation design induces myopic investment decisions, it is shown to be in the owners’ best interest. Copyright © 1999 John Wiley & Sons, Ltd.     

Mixed oligopoly, foreign firms, and location choice

We investigate a mixed market in which a state-owned, welfare-maximizing public firm competes against n domestic private firms and m foreign private firms which are all profit-maximizing. A circular city model with quantity-setting competition is employed. We find that the equilibrium location pattern depends on m. All private firms agglomerate in the unique equilibrium if m is zero or one. Two foreign firms induce differentiation between domestic and foreign private firms. More than two foreign firms yield differentiation among the foreign firms. Regardless of n and m, agglomeration of all domestic private firms appears in equilibrium. We provide several conditions in which eliminating the public firm from the market enhances social welfare. We extend the basic model and investigate three issues concerning multiple public firms, inefficiency of the public firm, and entries by private firms. We obtain some additional implications of welfare and equilibrium locations.     

The UK corporate tax reform and business investment decisions

The 1984 Finance Act made fundamental changes to the UK corporate tax system. Evidence from a detailed study of sixty past investment decisions is used to assess the likely effects of the shift from a high-tax, high-allowance system to a system of low taxes and allowances. This suggests that 100% allowances have had little impact on the scale of investment since 1979, reflecting limited taxable capacity and the importance of market considerations in investment decisions. Timing effects were more common, especially among small firms sampled. The post-tax cost of capital will fall for some firms but few appeared to use strict cost of capital criteria in assessing investments.     

The economics of retail firms

This paper identifies retail firms as an economic institution which delivers explicit products or services to consumer together with a variety of distribution services that determine the levels of distribution costs experienced by consumers in their purchase activities. The demand for the retailer's product is derived from a household production model in which the levels of distribution services provided by the retailer play the role of fixed inputs in the household's production functions. The supply of the retailer's product is derived from a joint cost function which is non-decreasing in the levels of distribution services provided. Profit-maximizing behavior in monopolistically competive markets shows that retail firms have special economic incentives to become complex organizations by integrating backwards, offering multiple explicit products and operating in more than one market. In addition, monopolistically competitive retail firms in long-run equilibrium will exhibit excess capacity, price dispersion and product choice in distribution services.     

Search in the product market and the real business cycle

Empirical evidence suggests that most firms operate in imperfectly competitive markets. We develop a search-matching model between wholesalers and retailers. Firms face search costs and form long-term relationships. Price bargain results in both wholesaler and retailer mark ups, which depend on firms' relative bargaining power. We simulate the general equilibrium model and explore the role of product market search frictions for business cycles. We conclude from the simulation exercise that incorporating product market search structure and shocks improve the standard real business cycle model to reproduce US business cycle fluctuations.     

CEO Overconfidence and Overinvestment Under Product Market Competition

How does product market competition influence whether CEOs with greater or lower levels of overconfidence are hired and whether CEOs overinvest in innovation? In a Cournot model in which firms hire a CEO to take charge of research and development (R&D) investment and production decisions, this paper shows that CEO overconfidence and overinvestment can be explained as an equilibrium outcome. More importantly, the intensity of product market competition and the equilibrium CEO overconfidence level (and R&D investment) exhibit an inverted U‐shaped relationship. As the product market tends toward perfect competition, all firms hire a realistic CEO and do not overinvest. Copyright © 2014 John Wiley & Sons, Ltd.     

Managerial overconfidence,overinvestment, and R&D spillover

This paper examines whether a firm will select an overoptimistic manager when a cost‐reduction investment has a spillover effect. We consider a Cournot competition model where R&D investment ex ante occurs before the process of product market competition. Our analysis reveals that there exists a unique and symmetric equilibrium for firms to delegate overoptimistic managers. We show that only when the spillover effect is sufficiently high do firms benefit from delegation. Furthermore, the equilibrium confidence level and investment decision first decrease and then increase as the spillover parameter changes. As the initial production cost increases, the equilibrium performance becomes worse.     

Adjusting to the national minimum wage: constraints and incentives to change in six low‐paying sectors

Interest in the national minimum wage (NMW) includes not only its direct impact on employment and wages, but also its indirect impact on organisational performance resulting from a reorientation of employer behaviour with regard to employment practices and product market competition. Drawing on data from small firms in six low‐paying sectors, this article identifies three key constraints that have undermined the possible effect of the NMW in generating a virtuous cycle between employment practices and product market approach. These constraints relate to product market conditions, employer norms and labour market institutions (especially training).     

Knowledge Stocks and Information Flows in New Product Development*

Although firms increasingly invest in systems (e.g. ISO, knowledge centres, IT systems) for utilizing stored knowledge and acquiring market information during new product development, few manage to benefit from these investments. To explore this issue, we suggest that firms rely on two distinct types of knowledge stocks– procedural and declarative memory – that affect new product short‐term financial performance and creativity in distinct ways. Additionally, we suggest that internal or external information flows can have distinct moderating impact on the memory types–product outcomes relationship. Our empirical study of product development activities indicates that there is an inverted U‐shaped relationship between procedural memory and product outcomes as well as a positive relationship between declarative memory and financial performance. Also procedural and declarative memory may work in a complementary fashion enhancing both outcomes. Finally, procedural memory is found to reduce the value of internal or external information flows for product creativity. These findings have important implications for the organizational knowledge, capabilities, and product development literatures as well as for practice and they open ways for future research.     

Career Concerns and Product Market Competition

This paper studies the effect of increased competition in the product market on managerial incentives. I propose a simple model of career concerns where firms are willing to pay for managerial talent to reduce production costs, but also to subtract talented executives from competitors. This second effect is privately valuable to firms, but is socially wasteful. As a result, equilibrium pay for talent can be inefficiently high and career concerns too strong. Explicit incentive contracts do not solve the problem, but equilibrium pay is reduced if managerial skills have firm‐specific components, or if firms are heterogeneous. In this second case, managers are efficiently assigned to firms, but equilibrium pay reflects the profitability of talent outside the efficient allocation. The effect of increased competition is ambiguous in general, and depends on the profit sensitivity to cost reductions. This ambiguity is illustrated in two examples of commonly used models of imperfect competition.     

Product market objectives and the formation of research joint ventures

In this paper we extend the existing literature on research and development (R&D) investments and research joint ventures (RJVs) in two important ways. First, we analyze and compare the case where firms collude in the product market to the benchmark case of competition in the output market. Second, we allow firms to form coalitions endogenously as a separate stage in the game. We develop profit functions that depend on the partition of firms into joint ventures and the nature of product competition between venture partners. Our results illustrate the restrictive nature of some assumptions made in the literature. Typically multiple RJVs of different sizes form in equilibrium. In general, RJVs should not be promoted if they entail product market collusion. Given the information available to policy‐makers, it is unlikely that an R&D policy more refined than analyzing and allowing RJVs on a case‐by‐case basis is feasible. Copyright © 1999 John Wiley & Sons, Ltd.     

When (not) to indulge in ‘puffery’: the role of consumer expectations and brand goodwill in determining advertised and actual product quality

We analyze why some firms advertise product quality at a level different from the actual quality of a product. By considering the interacting effects of product quality and advertising, we develop a dynamic model of consumer expectations about product quality and the development of brand goodwill to determine the optimal values for the decision variables. The model parameters are determined based on prior literature and we use numerical techniques to arrive at the solution. We then derive conditions under which a firm will find it optimal to overstate or understate product quality. The results suggest that quality may be overstated in markets characterized by high price sensitivity, low quality sensitivity, low brand loyalty, and high source credibility, suggesting the need for vigilance on the part of consumers, upper level managers and regulatory authorities in such market conditions. This is important because current regulatory resources are insufficient to reduce deceptive advertising practices (Davis JJ. 1994. Ethics in advertising decision‐making: implications for reducing the incidence of deceptive advertising. Journal of Consumer Affairs 28 : 380–402). Further, the law of deceptive advertising prohibits some advertising claims on the ground that they are likely to harm consumers or competitors (Preston IL, Richards JI. 1993. A role for consumer belief in FTC and Lanham Act deceptive advertising cases. American Business Law Journal 31 : 1–29). Also, Nagler (1993. Rather bait than switch: deceptive advertising with bounded consumer rationality. Journal of Public Economics 51 : 359–378) shows that deceptive advertising causes a net social welfare loss and a public policy effectively preventing deception will improve social welfare. Copyright © 2000 John Wiley & Sons, Ltd.     

The contours of employee voice in SMEs: the importance of context

This article develops a context‐sensitive approach to analyse how and why voice operates in small‐ to medium‐sized enterprises (SMEs), an area that remains under‐theorised and under‐researched. By building on a priori frameworks with proven ability to unpack complexity and take account of the wider context of SMEs, this article explores how resources (human and social capital) and constraints (product market, labour market and strategic orientation) interact to shape voice practices. The article finds significant differences between ‘reported’ compared with ‘actual’ practices in situ, and identifies different types of firms (‘strategic market regulation’, ‘strategic market‐led’ and ‘non‐strategic market‐led’) along with the factors that influence the form and practice of voice. Overall, the article argues that researchers should further pursue research that appreciates the layered nature of ontology and the role played by firm context to explain complex organisational phenomena, if we are to advance our understanding of voice practices in SMEs and beyond.     

Sustainability‐oriented capabilities for eco‐innovation: Meeting the regulatory,technology, and market demands

Despite consensus in the literature that regulation, technology push, and market pull drive eco‐innovation (EI), evidence remains limited on the diverse firm capabilities needed to boost EI. Building on the natural‐resource‐based view of the firm and the EI literature, this paper posits that firms need to renew and realign their capabilities, and ultimately develop distinctive sustainability‐oriented capabilities, in order to meet the rapidly changing regulatory, technology, and market demands. Results of the analysis, based on a survey of U.K. firms, reveal that EIs are more likely to arise when firms (a) build capabilities on voluntary self‐regulation (i.e., executive driven environmental management system and corporate social responsibility) because such organizational capabilities allow them to address increasing regulatory pressures; (b) invest in environmental research and development (i.e., eco‐R&D)—instead of generic research and development—because it provides them with the relevant and specific technological capabilities to tackle technology shifts towards sustainability; and (c) develop capabilities in green market sensing as such capabilities allow them to address green consumption needs.     

Employer preferences,collective agreements and the Australian resources sector: a paradox of limited commodification?

There is a commonly held view that firms in high‐wage/skill‐intensive sectors will tend to provide wages and working conditions that are above market‐clearing levels. This article empirically examines this claim by analysing the content of all collective agreements concluded in the resource sector in Australia after the enactment in 2006 of the Workplace Relations Amendment (Workchoices) Act. This legislation gave employers unprecedented ability to place downwards pressure on employee entitlements. In the resource sector, however, the quantitative results indicate that firms maintained, in the main, substantive standards but used extensively key regulatory provisions to gain an unprecedented level of control over both functional and numerical flexibility.     

The Who,Where, What,How and When of Market Entry

This introductory, along with the eight articles contained within this Special Issue, highlights and brings greater clarity to entrant‐incumbent interactions and to firm movement – when entrants traverse market territories for the creation and/or delivery of offerings, where ‘markets’ include service or product categories, technology or resource spaces, industries, sectors and/or geographies. Collectively, this Special Issues explains that firm movement across market boundaries is highly consequential, influencing resource‐capability mixes inside firms, interfirm relations, market logic and industry value chains, and of course, people, communities and even nations. Specifically, we develop a field‐wide perspective of market entry by expanding on the framework of market entry that Zachary and his colleagues developed (Zachary et al., 2015) – i.e., the who (players such as incumbents, entrants, suppliers, etc.), when (the timing and sequence of entry), how (the strategy, resources, capabilities, etc.), where (the space of entry) and what (product, service, business model, etc.) – to include two additional categories: complements (networks, platforms, ecosystems) and non‐market elements (government, political, social and cultural arrangements). We also summarize the eight highly diverse and insightful articles that make this Special Issue, and conclude with a discussion to highlight foundational questions that point to new directions in future research in this field. In sum, we hope to inspire scholars to go beyond counting outcomes (e.g., entry/exit rates, or profiling successful versus unsuccessful entrants), to consider contexts, processes and contingencies (e.g., cost, time, collaboration, competition, interfirm relations, etc.) and to discover boundary conditions that inform a theory of market entry.