Abstract
Firms frequently compete across multiple segments. Such multimarket contact has been shown to deter aggressive competition, leading to “mutual forbearance.” Empirical support for this phenomenon derives mainly from studies on the direct effects of multimarket contact on a firm's decision variables. The analysis in this article extends the existing literature by empirically considering both the direct effects of multimarket contact (i.e., how it affects a firm's decision variables) and its strategic effects (i.e., how it affects a firm's reactions to its competitors' decision variables). The authors study the pricing and new product introduction decisions of firms in the personal computer industry. Consistent with prior research, the authors find that firms mutually forbear in price and new product introductions. More important, the authors find strong strategic effects that are asymmetric; namely, firms respond to competitive attacks by introducing new products but do not use price as a retaliatory weapon. Thus, firms isolate any competitive retaliation to only a single marketing variable. The results offer a deeper understanding of the influence of multimarket contact on firm behavior.
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