IDEAS home Printed from https://ideas.repec.org/a/inm/orstsc/v9y2024i2p152-162.html

Incumbent Incentives in Response to Entry

Author

Listed:
  • Richard Saouma

    (Eli Broad College of Business, Michigan State University, East Lansing, Michigan 48825)

  • Orie Shelef

    (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

  • Robert Wuebker

    (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

  • Anita McGahan

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

Abstract

How should an incumbent respond to the arrival of an entrant? A long-standing literature documents a host of potential responses, but little work explores when each strategy will be more or less effective. This paper develops a model of incumbent-entrant competition between vertically and horizontally differentiated firms and applies that model to understand the incentives that shape an incumbent’s response to entry and ultimately, long-run profits. Analysis reveals the conditions under which an incumbent facing the full strategy space of possible exogenous entrants has incentive to attack an entrant and conditions where the incumbent has incentive to retreat. By viewing the incumbent and entrant in terms of their level of vertical and horizontal differentiation, this paper offers a unified view of prior work that generates insights about incumbent responses to entry that have been underappreciated. Further, this unified view offers insight on the effectiveness of a particular incumbent response.

Suggested Citation

  • Richard Saouma & Orie Shelef & Robert Wuebker & Anita McGahan, 2024. "Incumbent Incentives in Response to Entry," Strategy Science, INFORMS, vol. 9(2), pages 152-162, June.
    • Handle: RePEc:inm:orstsc:v:9:y:2024:i:2:p:152-162
    DOI: 10.1287/stsc.2022.0060
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/stsc.2022.0060
    Download Restriction: no
    File URL: https://libkey.io/10.1287/stsc.2022.0060?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & Lenos Trigeorgis & Jeffrey J. Reuer, 2017. "Real options theory in strategic management," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 42-63, January.
    2. Anoop R. Menon & Dennis A. Yao, 2017. "Elevating Repositioning Costs: Strategy Dynamics and Competitive Interactions," Strategic Management Journal, Wiley Blackwell, vol. 38(10), pages 1953-1963, October.
    3. Sendil Ethiraj & Yue Maggie Zhou, 2019. "Fight or flight? Market positions, submarket interdependencies, and strategic responses to entry threats," Strategic Management Journal, Wiley Blackwell, vol. 40(10), pages 1545-1569, October.
    4. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    5. Ron Adner & Daniel Snow, 2010. "Old technology responses to new technology threats: demand heterogeneity and technology retreats," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 19(5), pages 1655-1675, October.
    6. Nicholas Argyres & Joseph T. Mahoney & Jackson Nickerson, 2019. "Strategic responses to shocks: Comparative adjustment costs, transaction costs, and opportunity costs," Strategic Management Journal, Wiley Blackwell, vol. 40(3), pages 357-376, March.
    7. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & Joshua Gans & Michael D. Ryall, 2017. "Value capture theory: A strategic management review," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 17-41, January.
    8. Greg M. Allenby & Peter E. Rossi, 1991. "Quality Perceptions and Asymmetric Switching Between Brands," Marketing Science, INFORMS, vol. 10(3), pages 185-204.
    9. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    10. Dos Santos Ferreira, Rodolphe & Thisse, Jacques-Francois, 1996. "Horizontal and vertical differentiation: The Launhardt model," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 485-506, June.
    11. Wayne S. DeSarbo & Rajdeep Grewal, 2007. "An alternative efficient representation of demand‐based competitive asymmetry," Strategic Management Journal, Wiley Blackwell, vol. 28(7), pages 755-766, July.
    12. Hart, Oliver D., 1980. "Perfect competition and optimal product differentiation," Journal of Economic Theory, Elsevier, vol. 22(2), pages 279-312, April.
    13. Bilgehan Uzunca & Bruno Cassiman, 2023. "Entry diversion: Deterrence by diverting submarket entry," Strategic Management Journal, Wiley Blackwell, vol. 44(1), pages 11-47, January.
    14. Marvin B. Lieberman, 1990. "Exit from Declining Industries: "Shakeout" or "Stakeout"?," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 538-554, Winter.
    15. Philippe Aghion & Stefan Bechtold & Lea Cassar & Holger Herz, 2018. "The Causal Effects of Competition on Innovation: Experimental Evidence," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(2), pages 162-195.
    16. Richard Makadok & David Gaddis Ross, 2013. "Taking industry structuring seriously: A strategic perspective on product differentiation," Strategic Management Journal, Wiley Blackwell, vol. 34(5), pages 509-532, May.
    17. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
    18. Ron Adner & Rahul Kapoor, 2016. "Innovation ecosystems and the pace of substitution: Re-examining technology S-curves," Strategic Management Journal, Wiley Blackwell, vol. 37(4), pages 625-648, April.
    19. Brandts Jordi & Macleod W. Bentley, 1995. "Equilibrium Selection in Experimental Games with Recommended Play," Games and Economic Behavior, Elsevier, vol. 11(1), pages 36-63, October.
    20. E. Geoffrey Love & Nitin Nohria, 2005. "Reducing slack: the performance consequences of downsizing by large industrial firms, 1977–93," Strategic Management Journal, Wiley Blackwell, vol. 26(12), pages 1087-1108, December.
    21. David Besanko & Ulrich Doraszelski & Yaroslav Kryukov, 2019. "How Efficient Is Dynamic Competition? The Case of Price as Investment," American Economic Review, American Economic Association, vol. 109(9), pages 3339-3364, September.
    22. Richard D. Wang & J. Myles Shaver, 2014. "Competition-driven repositioning," Strategic Management Journal, Wiley Blackwell, vol. 35(11), pages 1585-1604, November.
    23. Richard Makadok, 2010. "The Interaction Effect of Rivalry Restraint and Competitive Advantage on Profit: Why the Whole Is Less Than the Sum of the Parts," Management Science, INFORMS, vol. 56(2), pages 356-372, February.
    24. Ghemawat, Pankaj, 1987. "Investment in lumpy capacity," Journal of Economic Behavior & Organization, Elsevier, vol. 8(2), pages 265-277, June.
    25. Gianluigi Giustiziero & Aseem Kaul & Brian Wu, 2019. "The Dynamics of Learning and Competition in Schumpeterian Environments," Organization Science, INFORMS, vol. 30(4), pages 668-693, July.
    26. Nambisan, Satish & Wright, Mike & Feldman, Maryann, 2019. "The digital transformation of innovation and entrepreneurship: Progress, challenges and key themes," Research Policy, Elsevier, vol. 48(8), pages 1-1.
    27. repec:fth:stanho:e-90-20 is not listed on IDEAS
    28. Avi Goldfarb & Mo Xiao, 2011. "Who Thinks about the Competition? Managerial Ability and Strategic Entry in US Local Telephone Markets," American Economic Review, American Economic Association, vol. 101(7), pages 3130-3161, December.
    29. Torrisi, Salvatore & Gambardella, Alfonso & Giuri, Paola & Harhoff, Dietmar & Hoisl, Karin & Mariani, Myriam, 2016. "Used, blocking and sleeping patents: Empirical evidence from a large-scale inventor survey," Research Policy, Elsevier, vol. 45(7), pages 1374-1385.
    30. Lyda Bigelow & Jackson A. Nickerson & Woo‐Yong Park, 2019. "When and how to shift gears: Dynamic trade‐offs among adjustment, opportunity, and transaction costs in response to an innovation shock," Strategic Management Journal, Wiley Blackwell, vol. 40(3), pages 377-407, March.
    31. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    32. Marvin B. Lieberman, 1989. "The learning curve, technology barriers to entry, and competitive survival in the chemical processing industries," Strategic Management Journal, Wiley Blackwell, vol. 10(5), pages 431-447, September.
    33. Ron Adner & Peter Zemsky, 2005. "Disruptive Technologies and the Emergence of Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 229-254, Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hirao, Morifumi & Zennyo, Yusuke, 2025. "Incumbent repositioning against a quality (dis)advantaged entrant with spillover effects," Journal of Business Research, Elsevier, vol. 192(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Morifumi Hirao, 2025. "Incumbent Repositioning Against Entry in a Vertically Differentiated Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 67(2), pages 161-189, August.
    2. Young Hou & Dennis Yao, 2022. "Pushed into a crowd: Repositioning costs, resources, and competition in the RTE cereal industry," Strategic Management Journal, Wiley Blackwell, vol. 43(1), pages 3-29, January.
    3. Wang, Pengfei & Shi, Yanlin, 2025. "Shoot the moving target: A dynamic perspective on optimal distinctiveness and strategic repositioning," Journal of Business Research, Elsevier, vol. 189(C).
    4. Devarakonda, S.V. & Goossen, Martin & Mulotte, Louis, 2024. "The allocation of resource control within the corporate structure: Evidence from post-acquisition patent reassignments," Other publications TiSEM 4e9af8a0-0e1c-4780-a24e-6, Tilburg University, School of Economics and Management.
    5. Bilgehan Uzunca & Bruno Cassiman, 2023. "Entry diversion: Deterrence by diverting submarket entry," Strategic Management Journal, Wiley Blackwell, vol. 44(1), pages 11-47, January.
    6. Claussen, Jörg & Kretschmer, Tobias & Spengler, Thomas, 2010. "Market leadership through technology – Backward compatibility in the U.S. Handheld Video Game Industry," Discussion Papers in Business Administration 12716, University of Munich, Munich School of Management.
    7. Ioannou, Christos A. & Makris, Miltiadis & Ornaghi, Carmine, 2021. "R&D productivity and the nexus between product substitutability and innovation: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 135-151.
    8. Michael J. Leiblein & Jeffrey J. Reuer & Todd Zenger, 2018. "What Makes a Decision Strategic?," Strategy Science, INFORMS, vol. 3(4), pages 558-573, December.
    9. Beata Cialowicz, 2024. "Formal Modeling of Innovative Competition in a Production System — an Evolutionary Approach," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7455-7474, June.
    10. Jiong Sun & Laurens G. Debo & Sunder Kekre & Jinhong Xie, 2010. "Component-Based Technology Transfer in the Presence of Potential Imitators," Management Science, INFORMS, vol. 56(3), pages 536-552, March.
    11. Jean J. Gabszewicz & Jacques-François Thisse, 2000. "Microeconomic theories of imperfect competition," Cahiers d'Économie Politique, Programme National Persée, vol. 37(1), pages 47-99.
    12. Xianjin Du & Meng Li & Brian Wu, 2019. "Incumbent repositioning with decision biases," Strategic Management Journal, Wiley Blackwell, vol. 40(12), pages 1984-2010, December.
    13. Afonso Almeida Costa & Peter Zemsky, 2021. "The choice of value‐based strategies under rivalry: Whether to enhance value creation or bargaining capabilities," Strategic Management Journal, Wiley Blackwell, vol. 42(11), pages 2020-2046, November.
    14. Paola Zanella & Paola Cillo & Gianmario Verona, 2022. "Whatever you want, whatever you like: How incumbents respond to changes in market information regimes," Strategic Management Journal, Wiley Blackwell, vol. 43(7), pages 1258-1286, July.
    15. Hyunjin Kim, 2025. "The Value of Competitor Information: Evidence from a Field Experiment," Management Science, INFORMS, vol. 71(4), pages 3600-3621, April.
    16. Joost Rietveld & J. P. Eggers, 2018. "Demand Heterogeneity in Platform Markets: Implications for Complementors," Organization Science, INFORMS, vol. 29(2), pages 304-322, April.
    17. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978, August.
    18. Natarajan Balasubramanian & Richard Makadok & Wan‐Ting Chiu, 2024. "The cue‐ball effect: How an advantaged firm's closer competitors can propagate the impact of its advantage to more distant competitors," Strategic Management Journal, Wiley Blackwell, vol. 45(6), pages 1087-1116, June.
    19. Nicholas Argyres & Lyda Bigelow & Jackson Nickerson & Hakan Ozalp & Erdem Dogukan Yilmaz, 2025. "Strategic Responses to Innovation Shocks: Evidence from the Video Game Industry," Strategy Science, INFORMS, vol. 10(2), pages 128-147, June.
    20. Gianluigi Giustiziero & Aseem Kaul & Brian Wu, 2019. "The Dynamics of Learning and Competition in Schumpeterian Environments," Organization Science, INFORMS, vol. 30(4), pages 668-693, July.

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orstsc:v:9:y:2024:i:2:p:152-162. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.