If they can do it, why not us? Competitors as reference points for justifying escalation of commitment

Abstract

This study highlights competitive market conditions as an important structural determinant of escalation of commitment. Bridging escalation behavior literature and competitive dynamics research, we argue that reference to certain rivals may enable or disable decision makers to justify continuing investment in an underperforming initiative, thereby influencing a firm`s tendency toward escalating commitment. We test our ideas using data on a set of leading companies in the information technology industry and their investment activities in China. Empirical analysis reveals strong evidence that a firm`s escalating tendency is increased by larger competitors` high action volume and smaller competitors` positive performance. In contrast to prior research focus on decision makers` persistence irrespective of external cues, we also find that a firm`s escalation behavior is decreased by larger rivals` negative performance.