Hypercompetition in a Multimarket Environment: The Role of Strategic Similarity and Multimarket Contact in Competitive De-Escalation

The effect of intra-industry heterogeneity on hypercompetitive escalation and de-escalation in a multimarket environment is examined. The authors study two critical dimensions of intra-industry heterogeneity: strategic similarity, which captures similarity in competitive orientation, and multimarket contact, which captures the degree of overlap between rivals in the multiple markets of the industry. Theory predicts that both variables influence the intensity of rivalry and competitive disruption. The predictions in the literature about the effect of strategic similarity on the intensity of rivalry are mixed. While strategic group theory proposes that strategic similarity may lead to lower rivalry, other theories (focusing on product differentiation, the resource-based view of the firm, and hypercompetitive escalation) predict that strategic similarity may actually increase rivalry. Those diametrically opposed propositions are captured as alternative hypotheses of the effect of strategic similarity. With respect to the effect of multimarket contact on the intensity of rivalry, the existing literature on multiple point competition predicts that multimarket contact should decrease rivalry, since it provides credible threats which discourage competitive escalation. The paper performs an empirical analysis of these hypotheses with data on over 3,000 city-pair markets of the U.S. airline industry. The paper focuses on the effects of changes in strategic similarity and multimarket contact in a city-pair market on the prices charged by airlines in that market. Other important factors which influence prices, such as service attributes, market characteristics, cost positions, market structure and firm-specific advantages, are rigorously controlled. The methodology used for the empirical analysis, a panel data regression with fixed-effect intercepts, also serves to control for other sources of stable differences across airlines and city-markets. The results show that strategic similarity moderately increases the intensity of rivalry, whereas multimarket contact strongly decreases it. Interestingly, the findings suggest that the effect of strategic similarity on intensity of rivalry may be biased if the effect of multimarket contact is not explicitly accounted for. This is due to the fact that strategic similarity may capture some of the strong de-escalation effect of multimarket contact when this variable is not controlled. This finding explains and challenges prior literature which found that strategic similarity reduces rivalry. The findings have important theoretical implications. For strategic group theory, they suggest two distinct dimensions of strategic heterogeneity (strategic similarity, multimarket contact), which should not be aggregated because they have opposite effects on the intensity of rivalry. These two dimensions should be separately considered to produce more rigorous analysis of rivalry within and between strategic groups. For hypercompetition theory, the findings indicate that hypercompetition in the cost-quality arena and stronghold invasion arena may lead in the future to greater competitive restraint. If hypercompetition in the cost-quality arena leads to greater differentiation in the market positions of firms, this could de-escalate competition. In addition, if hypercompetition in the stronghold invasion arena leads firms to obtain a broader multimarket overlap with their rivals, this condition could also provide the basis for deterrence and hypercompetitive de-escalation.