Multiple Point Competition and Competitive Signaling
Multiple Point Competition and Competitive Signaling
This paper is the pre-assignment number 5 for course TU-91.2040 Global Strategic Management. The task was to answer three questions based on articles by Karnani, A. & Wenerfelt B. (Multiple Point Competition, 1985) and Heil, O. & Robertson, T. (Toward a Theory of Competitive Market Signaling: A Research Agenda, 1991). The questions are as follows:
1) How would you define multiple market competition? 2) What are pros and cons of the four alternatives to respond to a competitive attack? 3) Why engage in competitive signaling?
Multiple market competition means a situation where two companies compete with each other not only in one place with one product but in several locations and possibly with similar products which are substitutes to each other. A simple example would be two companies of the same industry operating in two countries with the same products. As Karnani and Wenerfelt put it: “The more obvious examples of multiple point competition refer to situations where firms compete simultaneously in different product markets or in different geographical markets for the same product.”
Multiple market competition is characterized by four different situations: peace, limited war, mutual foothold and total war. Total peace is extremely rare if two companies operate in the same market. The more likely situation is limited competition where two companies for example suppress the prices of a single product but do not challenge the competitors on other areas, leading the competition to being limited and not total. Mutual foothold equilibrium means a situation where both companies have a small market share on each other’s home/core markets but their core markets are separate and they are not in a total war situation. Total war means a competition in (nearly) every market. This is often a result of an escalation from mutual foothold equilibrium. Total war is usually very costly for both companies and can also lead to weakening and destruction of both companies.
If company A comes under a competitive attack by company B, there are basically four ways how company A can react. Say that B lowers the price of product P on a mutual market. The first option is to do nothing. This naturally leads to B getting what it wanted: market share on the product P. The positive side is that there is no competition but the downside is that B won. Doing nothing also indicates weakness which might lead B to attack A on other markets also. The second option is to defend by also lowering the price of product P. This way there is limited competition equilibrium when both companies try to gain market share by suppressing prices. However, this might lead eventually to unprofitability in this product-segment and thus do harm to both companies.
The third option for company A is to counterattack by lowering the price of product Q which is also produced by company B. Another example would be that the companies gain new products and penetrate new markets with them to start competing with each other. This way both companies have a foothold in each other’s core markets and the situation is thus called mutual foothold equilibrium. Mutual foothold is quite stable as both companies can easily counterattack if another makes a move toward the other. If this happens, the companies are very near to total war which is the fourth option for company A. If the companies end up in total war the companies start to imitate each other with their product portfolio and market presence. The prices and costs are cut in all product lines which leads to lower profits for both companies. The only good thing resulting from a total war is for customers: the momentary price cut.
However, a long lasting total war drains the companies’ cash and resources for R&D which might make the products inferior and the companies vulnerable for new entrants with high-quality technology. Companies can also indicate their future intentions by signaling to other companies. There are basically two reasons for companies to engage in competitive signaling: conveying information or gaining information based on the reactions of the signal-receiving companies. Often the information delivered through different public signals would be illegal to directly communicate to competitors (e.g. a coming price increase) but the signals enable companies to exchange this kind of information. The usual reason for competitive market signaling is for the signal sender to get a pre-emption and to discourage the competitors for following. The message needs to be both clear and packed with a high level of perceived commitment in order for the target companies to take it seriously.
The message could be for example an intention of increasing production capacity or expanding to other market. This way the signaling company can gain pre-emptions and read their competitors’ reactions and countersignals. Through competitive signaling, companies can exchange information that would otherwise be illegal to convey. One example of such information would be making agreements on price increases. According to Heil and Robertson, this has been evident in airline industry where competing companies agreed on certain types of tickets’ pricing by changing their own prices on these tickets. This way other companies could get clear indications for other companies’ intension and willingness to raise prices. Exchanging this kind of information would lead to sanctions if the companies were to get caught in it. This kind of information is referred to as competitive norms of conduct.
To conclude this, by competitive market signaling, companies might gain important competitor information, pre-emption, mislead competitors or agree on norms of conduct with its competitors.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 27 December 2016
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