The Strategic Effects of Multimarket Contact: Mutual Forbearance and Competitive Response in the Personal Computer Industry

Abstract

Firms frequently compete across multiple segments. Such multimarket contact has been shown to deter aggressive competition, leading to what has been termed "mutual forbearance." Empirical support for this phenomenon derives mainly from studies of the direct effects of multimarket contact on a firm's decision variables. Our analysis extends the existing literature by empirically considering both the direct effects (i.e., how multimarket contact affects a firm's decision variables) and its strategic effects (i.e., how multimarket contact affects a firm's reactions to its competitors' decision variables). We study the pricing and new product introduction decisions of firms in the personal computer industry. Consistent with prior research, we find that firms mutually forbear in price and new product introductions. More important, we find strong strategic effects of MMC that are asymmetric in price and product decisions-firms respond aggressively to competitive attacks by introducing new products but do not use price as a retaliatory weapon. Thus, firms in the personal computer industry isolate any competitive retaliation to only a single marketing variable. Our results offer a deeper understanding of the influence of multimarket contact on firm behavior.

Keywords: Strategy, Marketing, Anittrust

JEL Classification: L10, L40, M31, C23, L63