How Do Incumbents Respond to Bottom-of-the-Pyramid Firm Entry?
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management
Indian Institute of Management (IIMB), Bangalore
October 31, 2012
Scholars argue that serving markets at the bottom of the pyramid (BOP), composed of consumers with low purchasing power, has been offered as a strategic business opportunity. Beyond serving low-end consumers, do BOP firms affect market prices and the strategic choices of incumbent firms? We examine the impact of a BOP firm’s potential and actual entry on incumbent pricing behavior, particularly that of high-end firms. We find that the threat of a BOP firm’s entry, as well as its actual entry lowers high-end prices and raises low-end prices in the market. We document similar changes in package sizes revealing a potential mechanism through which this impact on prices is manifested. A BOP firm’s entry lowers the package size offered by high-end firms, limits their ability to effectively price-discriminate, and leads to lower high-end prices and an overall increase in the volume of sales. The anticipation of a BOP firm’s entry increases low-end prices prior to actual entry, as low-end incumbents adjust their package-size strategy. We relate these results to recent theoretical models of mixed markets featuring high-end and low-end firm entry and reflect on what makes the BOP strategy sustainable.
Number of Pages in PDF File: 33
Keywords: entry, competition, bottom-of-the-pyramid, pharmaceuticals, India
JEL Classification: L13, L65, M20working papers series
Date posted: November 1, 2012 ; Last revised: April 15, 2013
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