The structure of competition: How competition between one’s rivals influences imitative market entry

Abstract

This paper investigates how the pattern of encounters between a firm`s competitors affects the firm`s inclination to follow its competitors into a new market. We theorize that direct encounters between a firm`s rivals lead to a herding effect, making imitative market entry more likely. Past mutual forbearance between a firm`s competitors (resulting from asymmetric multimarket competition) further strengthens this herding effect, by enhancing the firm`s expectations of market attractiveness. In contrast, aggressive past rivalry between the competitors (resulting from symmetric multimarket contact) dampens these expectations, producing a competition effect that makes herding less probable. We test our idea in two distinct contexts-the Chinese pharmaceutical industry and the Taiwanese computer hardware industry-and find consistent support in both settings. We discuss how our analysis of what we call the "structure of competition" can be extended to research on other forms of firm behavior.