Bringing Managers into Theories of Multimarket Competition: CEOs and the Determinants of Market Entry

Abstract

Multimarket (or multipoint) contact has been shown to deter aggressive actions by rivals toward each other, producing a situation of mutual forbearance among firms. To create this deterrent capability, however, firms must enter each others' markets, which is just the kind of action that the deterrent is supposed to limit. This study explores the questions: Under what conditions are firms likely to behave aggressively toward their multimarket rivals by entering their markets and when will they engage in mutual forbearance? We describe how the effect of multimarket contact on the market-entry moves of a firm changes as the level of contact a firm has with its rivals increases. We draw on competitive intelligence and decision-making theory to argue that the competitive advantages associated with multimarket contact are supplemented by the fact that a firm's multimarket competitors serve as a readily available model to reduce the uncertainty associated with market-entry decisions. We hypothesize that these factors lead firms to prefer, up to the point where forbearance concerns become paramount, to enter the markets in which their multipoint rivals already compete. We also argue that once multimarket contact levels reach the point where forbearance begins to operate, these levels also serve to stabilize the structure through better competitive intelligence, with the result that the propensity of a firm to enter into additional markets of its multimarket rivals declines. We then extend multimarket theory by focusing on the role of the CEO. Specifically, we argue that newer and longer-tenured CEOs are likely to face different influences on their preferences for particular competitive actions. We test hypotheses that link the likelihood that CEOs will abide by the mutual interdependencies that their firm's multimarket ties represent to their tenure in the CEO position. Our findings produce support for an inverted-U-shaped relationship between multipoint contact and market entry. We also find evidence that longer-tenured CEOs are guided by their firm's multimarket relationships. Newer CEOs, however, do not seem to adopt a forbearance approach toward their firm's multimarket competitors. Our findings have important implications for multimarket theory. This study is among the first to examine the role of managers within a multimarket context. We show that it is not enough for a firm to be embedded within a multimarket structure, but that for a firm to benefit from its multimarket position, its managers must be aware of this positioning and free of other influences that could cause them to behave in ways that are inconsistent with it. Because our findings show that newer CEOs can direct their firms to act in ways that are inconsistent with their firm's multimarket position, we identify an area of potential competitive vulnerability for the firm.