Fight or flight? Market positions, submarket interdependencies, and strategic responses to entry threats

Ethiraj, S K and Zhou, Y M (2019) Fight or flight? Market positions, submarket interdependencies, and strategic responses to entry threats. Strategic Management Journal, 40 (10). pp. 1545-1569. ISSN 0143-2095

Abstract

This paper examines how incumbent firms’ market positions and interdependencies across their submarkets influence their response to the threat of entry. 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 response. 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.