Pricing response to entry and agglomeration effects

McCann, Brian T.; Vroom, Govert

doi:10.1002/smj.805

Cited by 96 publications

(106 citation statements)

References 56 publications

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“…Our study also contributes to the empirical literature on how firms react to entry threat (e.g., Goolsbee & Syverson, ; Prince & Simon, ; Seamans, ). A large body of strategy literature has examined firms' ex post responses to entry (e.g., Casadesus‐Masanell & Zhu, ; Lieberman, , ; McCann & Vroom, ; Simon, ); however, the empirical literature on firms' ex ante responses to entry is relatively scant (e.g., Ethiraj & Zhou, ; Goolsbee & Syverson, ; Wilson, Xiao, & Orazem, ), partly due to the difficulty of empirically identifying the threat of entry separately from actual entry. Most entry‐threat studies focus on how firms respond to threats from comparable or smaller entrants, where both entry deterrence and entry accommodation motives could exist.…”

Section: Introductionmentioning

confidence: 99%

Threat of platform‐owner entry and complementor responses: Evidence from the mobile app market

Wen

Zhu

2019

Strategic Management Journal

201

125

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Research Summary This paper studies the impact of platform‐owner entry threat on complementors in platform‐based markets. We examine how app developers on the Android mobile platform adjust innovation efforts (rate and direction) and value‐capture strategies in response to the threat of Google's entry into their markets. We find that after Google's entry threat increases, affected developers reduce innovation and raise the prices for the affected apps. However, their incentives to innovate are not completely suppressed; rather, they shift innovation to unaffected and new apps. Given that many apps already offer similar features, Google's entry threat may thus reduce wasteful development efforts. We discuss the implications of these results for platform owners, complementors, and policy makers. Managerial Summary We examine one prevalent source of conflict: platform owners' entry into complementary product spaces. We show that app developers on Google's Android system are strategic and nimble actors. They respond to the threat of Google's entry by adjusting both value‐creation and value‐capture strategies. We also show that platform owners could use direct entry to shape innovation directions and encourage variety of complements. Overall, on the one hand, Google's entry may have pushed complementors into other areas (which might be less lucrative) and strengthened its position in the mobile market. On the other hand, the entry may have reduced wasteful production efforts in the development of redundant applications. The overall welfare implication is thus ambiguous.

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Section: Introductionmentioning

confidence: 99%

Threat of platform‐owner entry and complementor responses: Evidence from the mobile app market

Wen

Zhu

2019

Strategic Management Journal

201

125

View full text Add to dashboard Cite

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“…Entrants have been identified as one important determinant of the market dynamic, especially the profitability of incumbents (McCann & Vroom, ; Ravi Kumar & Sudharshan, ; Simon, ). Incumbents can be affected, for instance, when entrants attempt to penetrate a market by reducing prices, which intensifies competition among firms (Besanko, Dranove, Shanley, & Schaefer, ; McCann & Vroom, ; Rumelt & Teece, ; Simon, ).…”

Section: Introductionmentioning

confidence: 99%

Incumbent repositioning with decision biases

2019

Strategic Management Journal

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Research Summary Incumbent firms often reposition themselves in response to entrants, but when doing so they incur repositioning costs. Incumbent repositioning costs and the associated decision biases have been identified in the economics, operations, and strategy literatures as critical aspects of the competitive interactions between incumbents and entrants, but they have received limited attention in game‐theoretic treatments at the strategy level. To fill this gap, we develop a strategic mental model to analytically characterize the impacts of repositioning costs and decision biases on firms' equilibrium strategies and profits. Including these costs and biases changes, the nature of strategic dynamics as well as introduces new implications for strategic choice. Managerial Summary Our analysis shows that although biases by themselves are unequivocally harmful for firms, both the entrant and incumbent can earn more when they are biased than when neither one is. In particular, when an entrant is biased in estimating an incumbent's repositioning ability, this unequivocally reduces its own performance, if the incumbent is aware of the entrant's bias and has correctly assessed it. In a similar vein, when an incumbent is biased in its estimation of the entrant, this hurts the incumbent. However, both the entrant and the incumbent can earn more than they would in a setting where both firms are unbiased. Furthermore, the incumbent is not necessarily better off by being less biased—that is, aware of but with an inaccurate assessment of entrant bias.

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“…Geroski (1989) finds that entry increases profit margins earned by incumbents in 6% of the industries studied. Similarly, Perloff et al (1996), Ward et al (2002, Yamawaki (2002); Simon (2005); Goolsbee and Syverson (2008) and McCann and Vroom (2010) show that entry can lead to price increases in the pharmaceutical, consumer packaged goods, luxury car, magazine, airline and hotel industries, respectively.…”

Section: Empirical Relevancementioning

confidence: 95%