Competitive Retailer Strategies for New Market Research, Entry and Positioning Decisions

Abstract

This paper investigates strategies for new market research and positioning of stores or products by competing retailers in a duopoly setting. We examine the scenario where the two retailers are considering entry into an uncertain new market that is an extension of their existing markets. The retailers must make decisions on whether or not to first conduct research about the new market's location relative to their existing markets and its size before deciding on their own positioning in it. We first study a sequential-move leader–follower setup to highlight the choice of an “innovate-or-imitate” strategy. We find when the potential new market is small, neither retailer is adequately incentivized to do research to acquire information about the new market. As the size of the new market increases, the follower is induced to do such research. When the new market is very sizable, the leader conducts research and knows the new market's location while the follower free-rides. We then examine a simultaneous-move setup, in which one retailer might decide against acquiring new market information even when the cost of doing so is low. We further observe that differentiation (e.g., in terms of products or store locations) is greater in the simultaneous-move setup than in the sequential setup.