Pioneers' Marketing Mix Reactions to Entry in Different Competitive Game Structures: Theoretical Analysis and Empirical Illustration

Abstract

Pioneers' marketing mix reactions to new entries are recognized as important determinants of the outcome of pioneerlate mover competition, particularly in price-inelastic markets such as those for pharmaceuticals, cigarettes, and luxury goods. Managers in such markets are interested in better understanding when to accommodate (i.e., decrease marketing spending) or retaliate (i.e., increase spending) in nonprice marketing variables such as advertising and salesforce. In addition, the reallocation of marketing resources toward advertising (indicated by a pull strategy) or salesforce (indicated by a push strategy) upon entry is strategically important to managers. Previous theoretical research shows that pioneers should retaliate in both static and growing markets. Results from empirical research are mixed in that they support both accommodation and retaliation in growing markets. Empirical research also shows that a pioneer accommodates (retaliates) with its low (high) elasticity marketing mix variable. Contrary to prior research, however, some pioneers have successfully accommodated late movers in growing markets, and in some cases, have accommodated with their stronger marketing mix variables and also retaliated with their weaker marketing mix variables. For example, Bristol Myers Squibb's Capoten accommodated the entry of Merck's Vasotec in the growing ace-inhibitors market with its more powerful variable, salesforce, but also retaliated with its less potent variable, advertising. Moreover, not much is known about how the pioneer's marketing mix allocation should change (i.e., toward pull vs. push strategies) in response to new entries. We seek to better explain the pioneer's reactions and predict its shift in marketing mix allocation upon new entry. We note that prior research's predictions on the pioneer's reactions are based on a limited number of key factors such as product-market characteristics and the pioneer's elasticities prior to a new entry. In this paper, we extend previous research by adding two other critical factors, namely, the impact of new entry on the pioneer's elasticities and margin, and different competitive game structures to better predict and explain the pioneer's reactions. We develop analytical results on the pioneer's reactions in price, advertising, and salesforce in different competitive games (both Nash and different leader-follower games). In these results we identify the conditions under which the pioneer should accommodate, or retaliate, or not react to a late mover's entry, and shift its marketing mix allocation toward pull versus push strategies. We empirically illustrate some of the analytical results using data from a pharmaceutical category. We show that a pioneer who adopts a follower (leader) role with respect to a marketing mix variable in a static (growing) market, and witnesses a decrease (an increase) in own elasticity and margin upon a new entry, generally should accommodate (retaliate) in that variable. However, we are also able to show that there are cases where these general reactions don't hold. Thus, for example, it is possible for a pioneer to find it optimal to accommodate in a growing market or to retaliate even when its elasticity decreases upon entry, depending on the combination of competitive game, the impact of entry on elasticities and margin, and market growth. In this way, our results point to the fact that it is necessary to look not only at one factor at a time, but instead examine the combination of all the factors. We explain the empirical support for both accommodation and retaliation in growing markets by showing that the pioneer should accommodate (retaliate) a late mover with its competitively low (high) elasticity marketing mix variable. Competitively high (low) elasticity variables are not (are) likely to be significantly reduced by a new entry in the anticipated competitive game. With regard to reallocation of the pioneer's marketing mix, we show that the change in the pioneer's marketing mix allocation should follow the change in the relative marketing mix effectiveness after new entry. This, in turn, depends on the structure of competition, the impact of the late mover on its elasticities and margins, and the competitor's marketing mix elasticities, in addition to own elasticities. The results can guide managers on how factors such as competitive structure, changes in elasticities and margin, and market growth impact the pioneer's marketing mix decisions, and on when to accommodate, retaliate, or not react to a late mover's entry, and shift marketing mix allocation toward pull versus push strategies.