How Does Rivals' Presence Affect Firms' Decision to Enter New Markets? Economic and Sociological Explanations

Abstract

Four distinct theoretical programs have examined market entry decisions of multiunit firms, advancing different explanations for the relationship between a firm's likelihood of entry into a geographical market and the number of rivals that are already present in the target market. Within the strategy literature, theory of strategic interactions explains that firms will want to establish a foothold in markets where their multimarket competitors are scarce, but avoid markets where there are many multimarket competitors. Within economic geography, positive externalities such as increase in demand explain firms' desire to locate close to their rivals whereas negative externalities such as competition explain their desire to avoid them. Within the ecological tradition, density dependence theory explains this relationship in terms of legitimation of an organizational form in a particular market and subsequently increased competition for resources there. Within new institutional theory, the presence of rivals is seen as a signal that a particular market is suitable for entry. Although generally quoted and mentioned in the literature, these four explanations have not been sufficiently separated to indicate whether these four mechanisms all operate simultaneously or whether one of them might account for the often found inverse-U-shaped relationship. Distinguishing firms with different strategies and using various moderators, we test the four explanations jointly and demonstrate their scope of operation. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1723 . This paper was accepted by Jesper Sørensen, organizations.