Academic journal article Irish Journal of Management

Multimarket Contact Posture and Non-Price Competition: A Firm-Level Test of Forbearance Parameters

Academic journal article Irish Journal of Management

Multimarket Contact Posture and Non-Price Competition: A Firm-Level Test of Forbearance Parameters

Article excerpt

ABSTRACT

Multimarket contact (MMC) research is driven by the mutual forbearance hypothesis, which holds that firms confronting one another in multiple markets tacitly collude. Existing work emphasises price-related dependent variables however, begging the question of whether forbearance effects are pervasive across competitive dimensions, or are limited to price competition and coupled with amplified competitive intensity along such non-price dimensions as marketing and customer service. Interestingly, compelling rationales exist for both pervasive forbearance and partial forbearance hypotheses. This study theoretically explores and empirically tests the competing hypotheses in the United States (US) passenger airline industry. To this end, I introduce and operationalise a firm-level MMC construct designated Multimarket Contact Posture. Positive relationships are found between Multimarket Contact Posture and competitive intensity in both marketing and customer service, indicating support for the partial forbearance hypothesis.

Key Words: Strategic management; competitive dynamics; inter-firm rivalry; multimarket contact

INTRODUCTION

Multimarket contact (MMC) research examines how inter-firm relationships outside a focal market affect inter-firm behaviour within the market. Multimarket theory concentrates on the mutual forbearance hypothesis (Edwards, 1955), which holds that MMC engenders sufficient inter-firm familiarity and retaliatory potential to dampen focal market rivalry. Firms confronting one another across multiple markets recognise that a competitive attack can draw a retaliatory response not only in the attacked market, but at other points of contact as well (Edwards, 1955). Multimarket contact thereby magnifies the expected retaliatory costs of initiating an attack, providing firms with a strong incentive to withhold first-mover competitive actions (Karnani and Wernerfelt, 1985). As a result, firms recognising their extended interdependence will tend to 'mutually forbear' (Edwards, 1955), or tacitly collude in the pursuit of rivalry reduction. Numerous empirical studies lend support to the mutual forbearance hypothesis, finding evidence of muted rivalry in higher prices (Alexander, 1985; Busse, 2000; Evans and Kessides, 1994; Fu, 2003; Jans and Rosenbaum, 1997; Kang et al., 2010; Singal, 1996), higher margins (Coccorese and Pellecchia, 2009; Feinberg, 1985; Gimeno, 1999; Gimeno and Woo, 1996, 1999; Hughes and Oughton, 1993; Scott, 1982), and lower entry and exit rates (Baum and Korn, 1996; Boeker et al., 1997; Fuentelsaz and Gomez, 2006; Ghemawat and Thomas, 2008). Existing research, therefore, suggests that firms derive certain market-specific benefits from meeting focal market rivals in multiple other markets. From this perspective, a high level of MMC has salutorious effects on firm-market prices, margins and entry rates.

The compelling body of research on firm-market-level forbearance outcomes, however, does not broach the issue of firm-level implications of multimarket contact. Neither existing theory nor empirical evidence explicitly supports any relationship between MMC and firmwide behaviour or outcomes. Absent demonstrated links to the firm level, the strategic ramifications of multimarket contact remain unknown. Is MMC a peripheral consideration at the firm level, drowned out by more powerful concerns and of little consequence to the way a firm behaves and performs? Or do forbearance dynamics rooted in a firm's individual markets percolate upward one level of analysis, shaping organisation-wide actions and outcomes? If multimarket contact does find expression at the firm level, what is the nature of its influence? Are forbearance effects pervasive across competitive dimensions, or does multimarket contact influence non-price competition differently from price competition?

The purpose of this study is to more firmly establish the nature and significance of MMC's strategic impact. …

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