Big splash, no waves? Cognitive mechanisms driving incumbent firms’ responses to low‐price market entry strategies

• Author: Jukka Luoma,Tomas Falk,Henrikki Tikkanen,Alexander Mrozek,Dirk Totzek
• Date: 01 May 2018
• DOI: http://doi.org/10.1002/smj.2763
• Published date: 01 May 2018

RESEARCH ARTICLE

Big splash, no waves? Cognitive mechanisms

driving incumbent firms’responses to low-price

market entry strategies

Jukka Luoma

1

| Tomas Falk

1

| Dirk Totzek

2

| Henrikki Tikkanen

1

|

Alexander Mrozek

3

1

Department of Marketing, Aalto University

School of Business, Aalto, Finland

2

School of Business, Economics and Information

Systems, University of Passau, Passau, Germany

3

Google Germany, Berlin, Germany

Correspondence

Jukka Luoma, Department of Marketing, Aalto

University School of Business, P.O. Box 21230,

FI-00076 Aalto, Finland.

Email: jukka.luoma@aalto.fi

Research Summary: Low-price market entries, aiming for

rapid sales growth, tend to prompt strong competitive

reactions. This research explores whether and how firms

using low-price entry strategies can mitigate retaliatory

incumbent reactions. An experiment with 656 managers

shows that entrants can attenuate the strength of incum-

bents’responses by fostering perceptions of high aggres-

siveness or low commitment. Entrants may be able to

accomplish this by adjusting their entry strategy to embed

(subtle) cues of aggressiveness and (lack of) commitment.

A replication experiment with university students rein-

forces our overall theoretical argument. However, the

results also indicate that the interpretation of cues embed-

ded in the entry strategy may be affected by the experience

of incumbent firm managers. Overall, these results clarify

the cognitive foundations of competitive responses to mar-

ket entry.

Managerial Summary: What drives incumbents to

respond strongly to market entries, and what can the

entrant, if anything, do to mitigate those responses? This

research offers empirical evidence and theoretical insights

for managers faced with these questions by shedding light

on the thinking processes preceding competitive

responses. The study shows that while managers are moti-

vated to respond strongly to market entries that appear to

be highly consequential to their business, these responses

may be mitigated if the entrant manages to foster percep-

tions of high aggressiveness or low commitment to the

market. Managers form these perceptions in part on the

basis of the entrant’s behavior, creating an opportunity for

Received: 27 September 2015 Revised: 6 October 2017 Accepted: 23 October 2017 Published on: 30 January 2018

DOI: 10.1002/smj.2763

1388 Copyright © 2017 John Wiley & Sons, Ltd. wileyonlinelibrary.com/journal/smj Strat Mgmt J. 2018;39:1388–1410.

entrants to adjust their entry strategies in a manner that

demotivates strong competitive responses.

KEYWORDS

behavioral strategy, competitive dynamics, experimental

study, market entry, pricing

1|INTRODUCTION

Entering an existing market involves balancing two goals. On the one hand, it is desirable to enter a

market with a “big splash,”that is, to grow market share quickly and enjoy the associated positive

feedback effects, such as “learning by doing, scale economies, network effects, information conta-

gion, and the accumulation of complementary assets”(Sterman et al., 2007, p. 684). On the other

hand, entrants would like to avoid the “waves”associated with a big splash, that is, the strong, pos-

sibly devastating competitive reactions by incumbents. These goals are often seen as contradictory;

entrants must choose between making a high-impact entry and minimizing the likelihood of a coun-

terattack (Chen & Hambrick, 1995; Chen, Smith, & Grimm, 1992; Chen, Su, & Tsai, 2007).

This study explores the possibility that this trade-off may not be that clear-cut. Indeed, prior the-

oretical arguments suggest that highly impactful market entry strategies may sometimes deter

incumbent firm counterattacks (e.g., Fan, 2010; McGrath, Chen, & MacMillan, 1998; Wang &

Shaver, 2014). Consequently, we ask if and how a firm might be able to dampen the waves associ-

ated with a big splash market entry. And, if they can, what are the cognitive mechanisms underlying

a weakened competitive response of the incumbent?

We explore these issues in the context of entry pricing, focusing on what determines incumbent

responses to a new competitor’s low-price market entry strategy (LPMES). Entering a market with a

below-market price is appealing, as a low price offers a clear signal of economic advantage over the

incumbents’offerings, thus inducing customer switching and fueling rapid sales and market share

growth (e.g., Spann, Fischer, & Tellis, 2015). However, incumbents can easily spot the low price

and are likely to perceive it as threatening. As retaliatory price cuts are easy to implement, incum-

bents tend to rapidly cut prices in response to low-price market entries (Debruyne, Moenaertb, &

Griffinc, 2002; Kuester, Homburg, & Robertson, 1999), thus countering the intended positive effects

of an LPMES (McCann & Vroom, 2010; Simon, 2005).

Apart from that, managers’assessments of the entrant’s longer-term behavioral intentions might

also affect the incumbent’s competitive responses. In particular, we predict that managers are likely

to be less motivated to attack entrants who are expected to act aggressively in the market (e.g., Fan,

2010), due to a fear of triggering a destructive “race to the bottom.”Conversely, managers are more

prone to attack entrants perceived as committed to the market (e.g., Heil & Walters, 1993), due to

the belief that such entrants present a long-term competitive threat unless dealt with immediately.

Thus, the incumbent’s response may be mitigated if the entrant succeeds to foster perceptions high

aggressiveness or low commitment. An experiment with 656 managers supports these predictions. A

replication study with 1,070 university students reveals a qualitatively similar pattern of results.

Our study also illuminates how the entrant might be able to influence the incumbent’s percep-

tions of aggressiveness and commitment. Building on the cue approach (e.g., Chen & MacMillan,

LUOMA ET AL.1389