The paradoxical effect of prior operating experience and observational learning on new market entry

Abstract

AbstractWe study how prior operating experience interacts with observational learning to exert paradoxical effects on market entry. When a new market disrupts a firm’s standing routines, greater operating experience with these routines complicates adaptation and increases the firm’s uncertainty about the feasibility of entering, thereby delaying its entry. Yet, this entry uncertainty simultaneously prompts the firm to rely more heavily on learning from the observation of others entering which, in turn, hastens its entry. Patterns are opposite for firms that can leverage their standing routines into the new market. Here, greater operating experience and resultant momentum to extrapolate existing routines reduce a firm’s uncertainty about the feasibility of entry. This directly accelerates their entry but also diminishes the indirect, accelerating influence of observational learning. Because of these opposite dynamics, entry rates between firms with these different types of prior operating experience begin to diminish. Empirical analysis of entry patterns into the deregulation-created electric power trading market supports our theory and calls for modifications to previous expectations of prior operating experience exerting either a purely delaying or accelerating effect on entry, and, further, draws attention to the indirect pathways through which prior experience shapes entry patterns.