Big splash, no waves? Cognitive mechanisms driving incumbent firms’ responses to low‐price market entry strategies

Abstract

Research Summary: Low‐price market entries, aiming for rapid sales growth, tend to prompt strong competitive reactions. This research explores whether and how firms using low‐price entry strategies can mitigate retaliatory incumbent reactions. An experiment with 656 managers shows that entrants can attenuate the strength of incumbents’ responses by fostering perceptions of high aggressiveness or low commitment. Entrants may be able to accomplish this by adjusting their entry strategy to embed (subtle) cues of aggressiveness and (lack of) commitment. A replication experiment with university students reinforces our overall theoretical argument. However, the results also indicate that the interpretation of cues embedded in the entry strategy may be affected by the experience of incumbent firm managers. Overall, these results clarify the cognitive foundations of competitive responses to market entry. Managerial Summary: What drives incumbents to respond strongly to market entries, and what can the entrant, if anything, do to mitigate those responses? This research offers empirical evidence and theoretical insights for managers faced with these questions by shedding light on the thinking processes preceding competitive responses. The study shows that while managers are motivated to respond strongly to market entries that appear to be highly consequential to their business, these responses may be mitigated if the entrant manages to foster perceptions of high aggressiveness or low commitment to the market. Managers form these perceptions in part on the basis of the entrant’s behavior, creating an opportunity for entrants to adjust their entry strategies in a manner that demotivates strong competitive responses.

How Competitive Action Mediates the Resource Slack–Performance Relationship: A Meta‐Analytic Approach

“…One potential explanation that might offer a promising research opportunity involves focusing on the learning mechanisms and outcomes for each competitive strategy. Specifically, prior work suggests that both aggressiveness and complexity offer learning opportunities for firms and managers (Luoma et al, ; Miller et al, ); however, it is possible that the variety of actions in a complex strategy may create greater and more relevant learning opportunities for firms (Easterby‐Smith et al, ).…”

“…Such a sustained series of actions keep rivals off‐balance and inhibits their effective response (D’Aveni, ). Moreover, maintaining a high level of competitive activity enhances a firm’s internal knowledge through trial‐and‐error learning regarding sequences or patterns of competitive moves and counter‐moves (Grimm and Smith, ; Luoma et al, ). Sterman et al (, p. 684) suggest that competitive aggressiveness is associated with positive performance through ‘learning by doing, scale economies, network effects, information contagions, and the accumulation of complementary assets’.…”

Toward a routine-based view of interfirm rivalry

“…For students of the (social) psychology of competition, experiments (e.g. Luoma et al, 2018) might prove useful because experimental designs allow manipulating away the confounding effect of competitive action routines. Finally, to the extent that competition is the product of relatively enduring competitive action routines, one might also be able to apply machine-learning algorithms to predict competitive moves, even when the routines themselves cannot be observed.…”

Effects of Liberalization on Incumbent Firms’ Marketing-Mix Responses and Performance: Evidence from a Quasi-Experiment

“…Most foreign firms that enter a market after liberalization possess strong financial and managerial resources (Morck and Yeung 1991). Thus, incumbent firms may infer that these foreign entrants will continue to operate in the market in the long run even if they are not profitable in the short run (Luoma et al 2018). Given the serious nature of the competitive threat posed by foreign firms, incumbent firms may respond by intensifying their marketing-mix responses.…”