Competitive Behavior and Nonfinancial Objectives: Entry, Exit, and Pricing Decisions in Closely Held Firms

Because of the predominance of the assumption of profit maximization as the goal of the firm and its decision makers, especially in the competitive strategy literature, research has yet to investigate how differences in objectives might influence competitive actions such as entry, exit, and pricing decisions. This represents an important gap in the literature given the fundamental role of objectives in decision making and widespread evidence that many firms, especially those that are closely held, are motivated by nonfinancial objectives in addition to an interest in financial returns. To further our understanding of firms’ competitive strategy decisions, we discuss how the presence of nonfinancial objectives in closely held firms leads to a weakening of the relationship between economic indications of profitability and competitive behaviors. Using a unique data set of nearly 4,000 closely held and non-closely held establishments engaged in local competition in the Texas hotel industry, we find that the entry, exit, and pricing decisions of closely held establishments are less responsive to economic indicators of profit potential compared with decisions of non-closely held establishments.