How Do Incumbents Respond to Low-End Firm Entry?
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management
Indian Institute of Management (IIMB), Bangalore
June 6, 2014
IIM Bangalore Research Paper No. 410
This article investigates how incumbents respond to low-end firm entry. Prior theory suggests that high-end incumbents raise their price in response to a profit-maximizing low-end entrant but lower their price in response to a welfare-maximizing low-end entrant. This paper uses a dataset of 206 narrowly-defined pharmaceutical markets in India; identifies a low-end firm with a mission defined more broadly than profit maximization; and presents evidence of a decline in high-end prices and dosage sizes offered by incumbents due to anticipated and actual low-end entry. The paper also documents heterogeneous price and non-price responses by incumbents at the low end. Understanding market competition among firms with differing motives is especially important in light of 1) the growing view that shareholder value maximization may be unsustainable in the long term; and 2) the growing number of low-end entrepreneurial experiments across several countries and industries to serve consumers with limited purchasing power profitably.
Number of Pages in PDF File: 39
Keywords: entry, mixed markets, bottom-of-the-pyramid, pharmaceuticals, Indiaworking papers series
Date posted: June 13, 2013 ; Last revised: June 7, 2014
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