Product proliferation, complexity, and deterrence to imitation in differentiated‐product oligopolies

Abstract

Research SummaryGame theory suggests that, in oligopolistic markets characterized by nonprice competition, dominant incumbents can use product proliferation to occupy a region of the product space (i.e., a subspace) and deter rivals from imitating their products. In part, this is because product proliferation makes the introduction of close substitutes comparatively less profitable; in part, it is because the strategy conveys a threat of retaliation to potential imitators. Yet this threat is only credible if the proliferator has high costs of exit from the occupied region of space. We hypothesize that complexity, as a property of product (sub)spaces, generates exit costs for the proliferator and increases the deterrent power of its strategy. We test this hypothesis by studying sequential product introductions in the U.S. recording industry, 2004–2014.Managerial SummaryDifferentiated‐product markets are often concentrated in the hands of a few dominant organizations, which strive to keep on equal footing by offering similar products. In these markets, a product proliferation strategy can help one of the dominant incumbents claim a particular submarket as its territory. Investing heavily in that submarket communicates a threat that the proliferator will retaliate against invaders to protect these investments. However, this threat is not credible enough to deter rivals unless the occupied submarket is sufficiently complex in terms of product attributes, as precisely this kind of complexity makes it harder for proliferators to back down if challenged. We find evidence of this mechanism in an analysis of product competition among major record companies and discuss implications for strategic decision‐making.RESOURCESThis article has earned an Open Data badge for making publicly available the digitally‐shareable data necessary to reproduce the reported results. The data is available at https://github.com/piazzai/smj-18-19552. Learn more about the Open Practices badges from the Center for Open Science: https://osf.io/tvyxz/wiki.