Fight or Flight? Market Positions, Submarket Interdependencies, and Strategic Responses to Entry Threats
Strategic Management Journal, Forthcoming
42 Pages Posted: 6 May 2019 Last revised: 16 May 2019
Date Written: May 16, 2019
Abstract
This paper examines how incumbent firms’ market positions and interdependencies across their submarkets influence their responses to entry threats. We adapt a model of capacity deterrence to show that because premium and low-cost incumbents face different demand functions and operating costs, they experience different tradeoffs between ignoring, deterring, and accommodating threatened entry. In addition, the interdependencies within and between a premium incumbent’s submarkets influence its responses. Using data on incumbent responses to entry threats from Southwest Airlines between 2003 and 2012, we find that (1) full-service incumbents expanded capacity while low-cost incumbents did not respond significantly, and (2) full-service incumbents expanded capacity less aggressively in submarkets that had less substitutable customer segments and submarkets that were more complementary with their unthreatened submarkets.
Keywords: market position, interdependence, competitive interaction, entry deterrence, airlines
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