When Does Competition Foster Commitment?

Management Science, Forthcoming

37 Pages Posted: 3 Nov 2012 Last revised: 21 Aug 2015

See all articles by Daniel Ferreira

Daniel Ferreira

London School of Economics - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Thomas Kittsteiner

RWTH Aachen University

Date Written: February 27, 2015

Abstract

Consider a firm that would like to commit to a focused business strategy because focus improves efficiency and thus increases profit. We identify two general conditions under which tougher competition strengthens the firm's ability to commit to a focused strategy. Under these conditions, competition fosters commitment for two reasons: (i) competition reduces the value of the option to diversify (the contestability effect) and (ii) competition increases the importance of being efficient (the efficiency effect). We use a number of different models of imperfect competition to illustrate the applicability of our results. Our examples suggest that the contestability effect is very general. In contrast, the efficiency effect often requires further conditions, which are specific to the nature of competition in each model. In both cases, our analysis helps us predict when these effects are more likely to be observed.

Keywords: Business Strategy, Competition, Commitment

Suggested Citation

Ferreira, Daniel and Kittsteiner, Thomas, When Does Competition Foster Commitment? (February 27, 2015). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2170422 or http://dx.doi.org/10.2139/ssrn.2170422

Daniel Ferreira (Contact Author)

London School of Economics - Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
(+44) 20 7955 7544 (Phone)

HOME PAGE: http://personal.lse.ac.uk/FERREIRD/

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thomas Kittsteiner

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

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