Location Choices Under Strategic Interactions

36 Pages Posted: 6 Jul 2012 Last revised: 30 Aug 2012

See all articles by Juan Alcacer

Juan Alcacer

Harvard University - Strategy Unit

Minyuan Zhao

University of Pennsylvania

Cristian L. Dezso

University of Maryland - R.H. Smith School of Business

Date Written: May 24, 2012

Abstract

The literature on location choices has mostly emphasized the impact of location and firm characteristics. However, most industries with a significant presence of multi-location firms are oligopolistic in nature, which suggests that strategic interaction among firms plays an important role in firms’ decision-making processes. This paper explores how strategic interaction among competitors affects firms’ geographic expansion across time and markets. Specifically, we build a model in which two firms that differ in their capabilities enter sequentially into two markets with different potentials for profit. The model is solved using game theory under three learning scenarios that capture the ability of a firm to transfer its capabilities across markets: no learning, local learning, and global learning. Three equilibrium strategies arise: accommodate, marginalize, and collocate. We identify how these strategies emerge depending on the tradeoff between the opportunity costs of absence (giving competitors a lead in a market) and the entrenchment benefits (the cost advantage firms develop through learning-by-doing when they enter early). Both the opportunity costs of absence and the entrenchment benefits vary according to initial relative firm capabilities, relative market profitability, and learning rates. Our model offers a comprehensive approach to understanding the drivers of firm location choices by modeling not only the impact of location and firm heterogeneity, but also the strategic interaction among firms.

Keywords: location strategies, multinational strategy, oligopolistic competition, game theory, firm heterogeneity

Suggested Citation

Alcacer, Juan and Zhao, Minyuan and Dezso, Cristian L., Location Choices Under Strategic Interactions (May 24, 2012). Harvard Business School Strategy Unit Working Paper No. 12-104. Available at SSRN: https://ssrn.com/abstract=2101767 or http://dx.doi.org/10.2139/ssrn.2101767

Juan Alcacer (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-6338 (Phone)
617 495-0355 (Fax)

Minyuan Zhao

University of Pennsylvania ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

Cristian L. Dezso

University of Maryland - R.H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742
United States
301-405-7832 (Phone)

HOME PAGE: http://www.rhsmith.umd.edu/lbpp/faculty/deszo.html

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