Competitive Reactions to Market Entry: Explaining Interfirm Differences

Competitive reactions are recognized as a driving force influencing marketing decisions. The authors seek to explain how established competitors in an oligopoly react to a significant new entry in their market. It has been suggested that at least some established competitors will react to a market entry positively and at least some competitors will react negatively or not at all. Both theory and evidence suggest that not all firms will react to an entry in the same way. The authors posit that interfirm differences in competitive reactions to entry can be predicted by observing, for each competitor, the elasticity of each marketing mix variable. Competitors will retaliate with their effective marketing mix “weapons” and retreat with their ineffective marketing instruments. These predictions are tested by estimating the parameters of an econometric model of demand response functions and reaction functions with data from the market for an over-the-counter gynecological product and from the airline industry. Results, replicated in the two markets, are substantially consistent with predictions.