Fight or flight? Market positions, submarket interdependencies, and strategic responses to entry threats

• Published date: 01 October 2019
• Date: 01 October 2019
• DOI: http://doi.org/10.1002/smj.3044
• Author: Yue Maggie Zhou,Sendil Ethiraj

RESEARCH ARTICLE

Fight or flight? Market positions, submarket

interdependencies, and strategic responses to

entry threats

Sendil Ethiraj

1

| Yue Maggie Zhou

2

1

Strategy and Entrepreneurship Department,

London Business School, London, UK

2

Strategy Department, Stephen M. Ross

School of Business, University of

Michigan, Ann Arbor, Michigan

Correspondence

Yue Maggie Zhou, Stephen M. Ross School

of Business, University of Michigan,

701 Tappan St., Ann Arbor, MI 48109.

Email: ymz@umich.edu

Abstract

Research Summary:This paper examines how incumbent

firms' market positions and interdependencies across their

submarkets influence their responses to entry threats. We

adapt a model of capacity deterrence to show that because

premium and low-cost incumbents face different demand

functions and operating costs, they experience different

tradeoffs between ignoring, deterring, and accommodating

threatened entry. In addition, the interdependencies within

and between a premium incumbent's submarkets influence

its responses. Using data on incumbent responses to entry

threats from Southwest Airlines between 2003 and 2012,

we find that (a) full-service incumbents expanded capacity

while low-cost incumbents did not respond significantly,

and (b) full-service incumbents expanded capacity less

aggressively in submarkets that had less substitutable cus-

tomer segments and submarkets that were more comple-

mentary with their unthreatened submarkets.

Managerial Summary:An immutable market position is a

core competitive advantage. Using data on incumbent

responses to entry threats from Southwest Airlines

between 2003 and 2012, we find that (a) full-service

(FSC) incumbents expanded capacity while low-cost

(LCC) incumbents did not respond significantly, and

(b) FSCs expanded capacity less aggressively on routes

that were expected to have a large number of business pas-

sengers and routes that connected to their international

hubs. These results suggest two sources of positional

Received: 19 April 2017 Revised: 8 April 2019 Accepted: 12 April 2019 Published on: 17 June 2019

DOI: 10.1002/smj.3044

Strat Mgmt J. 2019;40:1545–1569. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 1545

immutability: While one set of past choices (e.g., those

about submarket substitutability or complementarity) pro-

vide a barrier against imitation, another set of past choices

(e.g., those about products and costs) generate incentives

for a tough defense, both deterring entry by firms from a

different position.

KEYWORDS

airlines, competitive interaction, entry deterrence, interdependence,

market position

1|INTRODUCTION

A classic prescription for attaining competitive advantage is for firms to identify and enter an attrac-

tive industry, and to identify and occupy an attractive market position within that industry (Porter,

1980). A market position aggregates a distinct set of interdependent strategic choices including

choices about resources, prices, quality, and submarkets

1

(Porter, 1980). The interdependencies and

tradeoffs among these choices are assumed to serve as a barrier to imitation and entry by firms from

different positions, thereby sustaining the position's competitive advantage (Porter, 1985, 1991):

Firms seeking to migrate across positions will face a “repositioning cost”in changing their historical

choices about resources, prices, quality, and submarkets (Menon & Yao, 2017). Despite the large

body of research on market positions, the crucial assumption that market positions are largely insu-

lated from direct competition from other positions and that competitive interaction occurs mostly

within rather than across positions has yet to be formally explored and empirically tested. In an effort

to improve our understanding of the sources of immutability that protect market positions, this paper

examines how the dynamics of competitive interaction vary within and across market positions.

We note that there is a vibrant and growing literature on competitive interactions (see excellent

reviews by Chen and Miller (2012, 2015); and more recent work by Makadok and Ross (2018)).

While this literature has resulted in a better understanding of competitive dynamics within industries

and the articulation of a theoretical framework (the Awareness-Motivation-Capability model), there

is limited cross-pollination with the literature on market positions. For example, the multimarket-

contact literature is more concerned with competitive interaction between firms across multiple

overlapping submarkets than competitive interaction within each submarket arising from positional

differences (Gimeno & Woo, 1999). Similarly, the emerging research about platform competition

focuses on firms with different business models such as newspapers and classified advertisement

websites rather than firms with different positions (Seamans & Zhu, 2017). In addition to general

positional differences, differences in submarket interdependencies, or interdependences existing

either between segments within the same submarket or between different submarkets that a firm

operates in, are understudied. To the extent that market positions reflect mutually reinforcing,

interdependent choices (Ghemawat & Levinthal, 2008), a focus on interdependencies among

1

Throughout this paper, the word “market”refers to the entire market in an industry when it appears in the phrase “market

position.”The word “submarket”refers to individual markets in different locations or product categories operated by a firm.

1546 ETHIRAJ AND ZHOU