Abstract
AbstractResearch SummaryGoing back to Bain (1956), strategy scholars have long recognized the importance of deterring entry for sustaining incumbents' profits in an industry. We introduce a new mechanism, entry diversion, to better understand the empirical phenomenon of persistent firm entry in spite of investments in entry deterrence by incumbents in some industries. Entry diversion happens when preemptive strategic investments by incumbents decrease the expected future profits from a target submarket such that entrants choose to enter another submarket within the same industry. Empirical evidence from the global semiconductor manufacturing industry suggests that incumbents expand their capacities beyond demand growth, and that these investments effectively divert entry into other submarkets. Greenfield entrants are more responsive to entry diversion than incumbents.Managerial SummaryManagers have long understood that deterring entry of new players into their industry could sustain their firms' profits. In this article, we introduce a new mechanism, entry diversion, where the incumbent diverts potential entrants from its submarket toward other submarkets in the same industry. Entry diversion happens when preemptive strategic investments by incumbents decrease the expected future profits of the entrant in a submarket of the industry such that the entrant chooses not to enter the incumbent's submarket. Contrary to entry deterrence, new players will still enter the industry but settle in different submarkets. Empirical evidence from the global semiconductor manufacturing industry suggests that incumbents expand their capacities beyond demand growth, and that these investments effectively divert entry into other submarkets.
Highlights
Going back to Bain (1956), strategy scholars have long recognized the importance of deterring entry for sustaining incumbents' supernormal profits in an industry (Porter, 1980)
30We calculated minimum efficient scale (MES) as the average size of the largest plants accounting for the 50% of output per year (Comanor & Wilson, 1967: 438). 31In unreported robustness checks we show that weighting other submarkets' excess capacity with the MES ratio adds meaningful explanatory power to our empirical model when we entered it together with the MES ratio and the unweighted other submarkets' excess capacity. 32We experimented with submarket growth; this variable did not add any significant explanatory power; we present the results with submarket density only. 33In the Appendix, we provide negative binomial and OLS regression results which are mostly consistent with our Poisson model (See appendix Table A1, A2, A3, A4)
We contribute to the entry literature by advancing a new and potentially important mechanism within the broad topic area of entry deterrence
Summary
Going back to Bain (1956), strategy scholars have long recognized the importance of deterring entry for sustaining incumbents' supernormal profits in an industry (Porter, 1980). It might be sufficient to divert entry into other submarkets within the same industry This may explain why, at the industry level, there is little empirical evidence for entry deterrence (Cookson, 2018) and why entry rates are hard to explain using conventional measures of profitability and entry barriers (Geroski, 1995: 430): Entry happens in different submarkets. This might seem a straightforward reclassification exercise where entry deterrence applies to the submarket-level rather than to the industry-level, we go one step further by showing the impact of submarket interdependencies on entry deterrence (Ethiraj & Zhou, 2019). When one submarket deters entry, another might be attracting it, and these are not independent processes: entry deterrence might not be happening at the industry level, but at the submarket level
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