Getting to multimarket competition: How multimarket contact affects firms' market entry decisions

Abstract

Studies of multimarket contact typically hypothesize (and find) that the relationship of contact levels between firms and the likelihood of aggressive competitive behaviors is linear and negative. This includes the likelihood of entry moves by multimarket rivals. However, a linear negative relationship between market entry and multimarket contact, which implies that deterrence exists at lower levels of contact, makes it unlikely that firms' will enter into each others' markets in order to create that deterrent. We address this theoretical issue by distinguishing between multimarket contact and multimarket competition. Lower levels of multimarket contact provide models for a focal firm that both guide and legitimize its strategic moves. As multimarket contact levels increase, multimarket competition eventually ensues as multimarket rivals recognize their mutual interdependence and further entry into shared markets is deterred. We develop the logic for this non-linear relationship by incorporating theory from the strategic, institutional, and decision-making literatures that has direct implications for the way in which contact between firms across multiple markets is likely to affect managerial cognitions and firm actions. Since firms must enter into the markets of their (multimarket) competitors to build multimarket structures which yield competitive benefits, we conclude by developing several propositions about how such entry might best be achieved to avoid retaliatory responses by multimarket competitors.