Big splash,no waves? Cognitive mechanisms driving incumbent firms’ responses to low‐price market entry strategies

Research Summary: Low‐price market entries, aiming for rapid sales growth, tend to prompt strong competitive reactions. This research explores whether and how firms using low‐price entry strategies can mitigate retaliatory incumbent reactions. An experiment with 656 managers shows that entrants can attenuate the strength of incumbents’ responses by fostering perceptions of high aggressiveness or low commitment. Entrants may be able to accomplish this by adjusting their entry strategy to embed (subtle) cues of aggressiveness and (lack of) commitment. A replication experiment with university students reinforces our overall theoretical argument. However, the results also indicate that the interpretation of cues embedded in the entry strategy may be affected by the experience of incumbent firm managers. Overall, these results clarify the cognitive foundations of competitive responses to market entry. Managerial Summary: What drives incumbents to respond strongly to market entries, and what can the entrant, if anything, do to mitigate those responses? This research offers empirical evidence and theoretical insights for managers faced with these questions by shedding light on the thinking processes preceding competitive responses. The study shows that while managers are motivated to respond strongly to market entries that appear to be highly consequential to their business, these responses may be mitigated if the entrant manages to foster perceptions of high aggressiveness or low commitment to the market. Managers form these perceptions in part on the basis of the entrant’s behavior, creating an opportunity for entrants to adjust their entry strategies in a manner that demotivates strong competitive responses.     

The Entry-Inducing Effects of Horizontal Mergers: An Exploratory Analysis

Antitrust law presumes that entry normally prevents or reverses anticompetitive effects from horizontal mergers. But when sunk costs associated with entry are at levels suggested by prevailing market structure, the opportunity for entry created by an anticompetitive merger plausibly is too small to induce entry, even absent Stiglerian ‘barriers to entry.’ This is illustrated for Cournot and Bertrand models. Significant entry also makes otherwise profitable Bertrand mergers unprofitable, assuming no efficiency gains. Consequently, the entry issue can be collapsed into the efficiency issue: if a presumably profitable merger does not generate significant efficiencies, it cannot be expected to induce entry.     

Endogenous Network Formation in Patent Contests And Its Role as A Barrier to Entry

In a setting of R&D competition, we study how collaboration affects strategic decisions during a patent contest, and how the latter influences the collaboration network structures the firms can form. We use an all pay auction approach to endogenize both network formation and R&D intensities, and to take heterogeneous and private valuations for patents into account. We find that the complete network is not always the only pairwise stable one. The other stable networks have the realistic property that some firms drop out of the contest. Thus, ‘weak’ cooperation can serve as a barrier to entry on the market for innovation.     

Choosing between Order‐of‐Entry Assumptions in Empirical Entry Models: Evidence from Competition between Burger King and McDonald's Restaurant Outlets

We demonstrate how a non‐nested statistical test developed by Vuong [1989] can be used to assess the suitability of alternate order‐of‐entry assumptions used for identification purposes in empirical entry models. As an example, we estimate an entry model of McDonald's and Burger King restaurant outlets in United States. The data set focuses on relatively small ‘isolated’ markets. For these markets, the non‐nested tests suggest that order‐of‐entry assumptions that give Burger King outlets a first‐mover advantage are statistically preferred. Last, a Monte Carlo experiment provides encouraging results suggesting that the Vuong‐type test yields reliable results within the entry model framework.     

Barriers to Entry and Competitive Behavior: Evidence from Reforms of Cable Franchising Regulations

Between 2005 and 2008, nineteen of the fifty states of the U.S. reformed the franchising process for cable television, significantly easing entry into local markets. Using a difference‐in‐differences approach that exploits the staggered introduction of reforms, we find that prices for ‘Basic’ service declined systematically by about 5.5 to 6.8 per cent following the reforms, but we find no statistically significant effect on average price for the more popular ‘Expanded Basic’ service. We also find that the reforms led to increased actual entry in reformed states, by about 11.6% relative to non‐reformed states. Our analysis shows that the decline in price for ‘Basic’ service holds for markets that did not experience actual entry, consistent with limit pricing by incumbents. To control for potential state‐level shocks correlated with the reforms, we undertake a sample‐split test that finds larger declines in prices for both ‘Basic’ and ‘Expanded Basic’ services in local markets which faced a greater threat of entry (because they were close to a prominent second entrant). Our results are consistent with limit pricing models that predict incumbents respond to increased threat of entry, and suggest that the reforms facilitated entry and modestly benefited consumers in reformed states.     

Economies of scale,strategic advertising and fully credible entry deterrence

Recent work on entry deterrence has emphasized the distinction between a monopolist’s reversible and irreversible preentry strategic moves (e.g., limit pricing) will not credible deter a rational potential entrant. Dixit (1980) and other have demonstrated, however, that irreversible preentry capacity investments can result in credible deterrence. In this paper, we examine preentry advertising investments which irreversibly alter postentry demand conditions. Using an infinite horizon model, we show that preentry investments in advertising may result in credible deterrence even for the extreme case where an entrant expects a collusive postentry price, and the monopolist ceases all advertising at the moment of entry.     

Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?

This paper investigates the effects of buyer power on entry into an atomistic upstream market and economic welfare. Under reasonable market conditions, we show that industries with a few buyers induce more upstream entry than industries with a larger number of firms. In particular, monopsony can be more conducive to entry and lead to higher social welfare than more fragmented industry structures. This seeming paradox arises because a single buyer better internalizes the positive effects of entry on later-periods’ supply conditions than a collection of firms. This result is relevant in a number of market settings, including markets for specialized labor and processing markets for agricultural products.     

Can first-mover and early-mover advantages be sustained in an industry with low barriers to entry/imitation?

This study examines whether first-mover and early-mover advantages can be sustained in an industry where the barriers to entry are generally low and new product innovations can be easily imitated—namely, the money market mutual fund industry. Using a simultaneous-equation supply-and-demand model of panel data from a variety of money market fund product categories, the study finds that first-movers and early-movers enjoy both a highly sustainable pricing advantage and a moderately sustainable market share advantage. These counterintuitive results are interpreted in terms of the structural characteristics of demand in the industry. Implications of these results for the ongoing debate between the ‘sustainability’ and ‘hypercompetition’ perspectives are discussed. © 1998 John Wiley & Sons, Ltd.     

Agricultural supply response and poverty in Mozambique

This paper identifies key causal factors behind farmers’ marketing decisions in Mozambique. A two-step decision making process is outlined. Farmers decide, first, whether or not to participate in the market. Next, they decide how much to sell. The model is estimated using a Heckman switching regression approach. The key importance of non-price factors such as risk, technology and transport infrastructure come out clearly. Marginal effects are calculated for poor and nonpoor households and broken down into a market participation and a quantity (sales value) component. The marginal effects for the poor are not substantially different from those of the nonpoor. This suggests that differences in area-based characteristics (especially risk and technology) are more influential in the commercialization process than differences in how the poor and the nonpoor respond to incentives. Moreover, interventions to promote market access are likely to solicit a greater volume of additional supply from peasants entering the market for the first time than from existing market participants stepping up their production and sales. To achieve pro-poor rural growth it is essential to address explicitly the conditions of high-risk, low productivity and low capital endowments of poor farmers.     

Selective entry and auction design

This article examines how different auction designs perform when entry is endogenous and selective, by which we mean that bidders with higher values are more likely to enter. In a model where potential bidders are symmetric, we show that three alternative designs can significantly outperform the ‘standard auction with simultaneous and free entry’ when entry is selective. When bidders are asymmetric, we show that level of bid preference that maximizes a seller’s revenues is significantly affected by the degree of selection. We also describe recent empirical and econometric work that shows that the degree of selection can be identified and estimated using standard types of auction data.     

The impact of competitive advantage on the investment timing in Stackelberg leader–follower game

This short note clarifies how the Stackelberg leader’s competitive advantage after the follower’s entry affects the leader’s optimal market entry decision and Stackelberg strategic interactions under uncertainty. Although the Stackelberg leader’s first investment threshold remains constant and coincides with the monopolist’s investment trigger, his second (third) investment threshold, which defines the exit (entry) of the first (second) investment interval, increases with an increased competitive advantage. With an increased competitive advantage, the probability of sequential investment equilibrium (simultaneous investment equilibrium) increases (decreases) irrespective of the level of volatility. Moreover, for a given level of competitive advantage, an increase in the volatility tends to decrease (increase) the probability of simultaneous investment equilibrium (sequential investment equilibrium). For a richer set of results, endogenous firm roles are examined and analyzed as well. The leader’s preemptive threshold is negatively affected by his competitive advantage.     

Second Mover Advantage and Entry Timing

We describe a model of entry timing assuming that a second mover can benefit from observing the experience of a first mover. We focus on how market attractiveness characteristics such as size and cost affect the time until first entry. The effects depend on whether the number of participants is exogenous or endogenous. In the former case, a more attractive market leads to earlier entry. In the latter case, it leads to later entry. Treating the number of firms as an integer, free entry leads to non‐monotone, but testable, effects of market attractiveness on entry timing.     

Institutional and resource configurations associated with different SME foreign market entry modes

This study explores the different configurations of internal and externally sourced resources utilized by SMEs, as well as host and home country institutional influences (hereafter abbreviated to ‘internal and external resources’, and ‘host and home country institutions’, respectively) across different foreign market entry modes in a B2B setting. Specifically, this research illustrates the different relative representations of internal vs external resources and host vs home institutions associated with different entry modes, including non-investment/contractual and early-stage investment modes. The different configurations resulting from our study are tentatively explained in the context of prevailing theoretical perspectives, namely, the resource-based view, institutional theory, and SME internationalization. Our research extends the existing literature on SME internationalization by identifying that different resource-institutional configurations are associated with different foreign market entry modes.     

Doomed from the start: what is the value of selecting a future dominant design?

This study investigates how important it is for a firm to select what turns out to be a dominant design in a technology‐driven industry. Using the personal computer industry as a case study, this research shows that firms are not doomed when their entry design choices turn out to be ‘wrong.’ For early entrants, we found that switching to the dominant design is associated with increased chances of survival and market share. Contrary to our expectations, we found that even later entrants that switched to the dominant design also enjoyed higher survival rates and greater market position. Copyright © 1999 John Wiley & Sons, Ltd.     

Product specification under a threat of entry: Evidence from Airlines’ departure times

I examine how incumbent airlines adjust their departure times in response to the threat of entry by Southwest Airlines. I find that incumbents space their flights more evenly throughout the day when faced with potential entry. This reaction depends strongly on the level of the incumbent’s market share and hub status at the endpoint airports of a market. The evidence suggests that incumbents’ actions are designed to deter, rather than accommodate, entry. I do not find effects on flight frequency, suggesting that incumbents may rely more on the strategic choice of product attributes than on product proliferation to deter entry.     

Strategic dynamics of antibiotic use and the evolution of antibiotic-resistant infections

This paper studies a dynamic model of a fee-for-service healthcare system in which healthcare providers attract patients by prescribing antibiotics. Using antibiotics limits antibiotic-treatable infections, but fosters the growth of antibiotic-resistant infections. The paper demonstrates a ‘Goldilocks’ effect from provider competition. A perfectly competitive market for providers over-prescribes antibiotics because providers do not bear the cost of antibiotic-resistant infections. A patient monopolist under-prescribes antibiotics in order to increase the level of treatable infection. This is because while infection is a ‘bad’ for society, infection is a ‘good’ for a provider of antibiotics under a fee-for-service regime. Due to more moderate antibiotic use, oligopolistic competition can be the optimal decentralized market structure. The paper then demonstrates how the model can be used for policy analysis.     

中国大飞机产业化的市场约束与进入条件

中国大飞机项目成功的关键在于实现产业化,而能否产业化又取决于市场基础。由于民用大飞机产业属于买方约束条件十分严格的市场,中国大飞机项目产业化的基本立足点应该是储备进入市场的条件。目前中国国内民用航空市场的结构状况不利于国产大飞机进入市场,应当对航空公司作进一步重组的市场制度安排。为了能使中国的大飞机在实现规模化生产之前就能获得“买家”的订单,有必要在航空运输市场重组现有的航空公司,减少航空公司的数量,鼓励更有实力的航空公司的涌现。     

Why Have Workers Stopped Joining Unions? The Rise in Never‐Membership in Britain

This paper tracks the rise in the percentage of employees who have never become union members (‘never‐member’) since the early 1980s and shows that it is the reduced likelihood of ever becoming a member, rather than the haemorrhaging of existing members, that is behind the decline in overall union membership in Britain. We estimate the determinants of ‘never‐membership’ and consider how much of the rise can be explained by structural change in the labour market and how much by change in preferences among employees.     

A combinatorial auction to sell TV broadcasting rights in league sports

The centralized sale of TV broadcasting rights in league sports constitutes a cartel which in many European countries is allowed only if it complies with certain conditions set by competition authorities. Two of the most important conditions are: i) partial unbundling, i.e. the rights must be unbundled into several separate packages; and ii) the no-single-buyer rule, i.e. the packages must be sold to different broadcasters. This article shows how a combinatorial auction can be employed to sell broadcasting rights allocating them endogenously based on the broadcasters’ bids and, thus, without requiring the seller to pre-determine the packages of such rights. This feature can address various competition policy issues, including facilitating market entry and preventing coordination among bidders. Also, a combinatorial auction has the potential to achieve higher levels of allocative efficiency and higher revenue levels compared to auctions with pre-determined packages of broadcasting rights.     

Applying multiple perspectives to the design of a commercialization process

Most commercialization models begin by taking an idea through some sort of stage‐gate product development process. There is much talk about building market thinking into this process, but this paper argues that much more is required. The research identified three perspectives required to be present at all stages of product development. The first is labelled ‘technical and operational’, the second ‘strategic’ and the third ‘commercial’. The paper argues that each perspective is required at every stage to drive the right activities that lead to successful commercialization. The science, idea and opportunity stage leads onto the technology and feasibility stage, which in turn leads onto the product and market readiness stage. The research applied the grounded theory methodology to categorize and represent data obtained from interviews and desk research. The resulting model was introduced to a New Zealand Crown Research Institute during a consulting assignment in 2004. Three external experts were selected based on their particular perspectives and experience in the area of product development. Each perspective was built into the commercialization process. Applying multiple perspectives has led to a more robust approach to product development and a greater awareness of how multiple tools work together to create a holistic product development process. Each perspective of the commercialization process can be broken down into detailed stages. The technical and operational perspective addresses areas such as opportunity creation, proof of concept and market readiness. The strategic perspective addresses areas such as strategic fit, strategic analysis/choice and pathways to market. Finally, the commercial perspective addresses areas such as opportunity assessment, feasibility study/business planning and launch.After being in place for 18 months, the challenges faced in implementation were discussed with the current commercialization manager and the model was adapted to another institute wishing to develop a design‐led commercialization process. A key finding of the research was the common understanding of language and meaning across three distinct disciplines and the involvement of each discipline in the decision‐making process. All parties accepted the value of each other's contribution once the different perspectives were understood and accepted. The paper provides useful insights for those involved in the design of commercialization processes and establishes a multi‐dimensional framework that assists in facilitating the different perspectives required for successful commercialization.