Author

Sina Aghaie

Date of Award

Summer 2019

Document Type

Open Access Dissertation

Department

Moore School of Business

First Advisor

Rafael Becerril Arreola

Second Advisor

Carlos J.S. Lourenço

Abstract

The proliferation of low-cost competitors has increasingly eroded incumbent firms’ market shares and profitability in recent decades. However, incumbents are still uncertain about how to handle this new challenge. The two essays in this dissertation aim to contribute to the marketing strategy and competitive dynamics literature by exploring the link between incumbents’ marketing-mix activities and low-cost rival’s market entry, exit, and the threat of entry decisions.

In the first essay, I study a common and important phenomenon – the marketing tactics that incumbent firms employ to drive new low-cost entrants out of the market. Specifically, I investigate how incumbents’ price, service quality, and service convenience influence an entrant’s market exit, and how this influence may change over time. The hypotheses are tested on a rich, longitudinal dataset from the US airline industry between 1997 and 2016. I estimate challengers’ time-to-exit using a split population hazard model that accounts for challengers that ‘never’ exit. Instead of homogeneous results, I find that the magnitude and direction of the effects vary over time. For instance, a substantial price-cut initially delays but will later accelerate an entrant’s exit timing. I suggest that managers should take into account the type (price vs. quality), timing (sooner vs. later after entry), and intensity (more vs. less) of defensive responses to a new low-cost entrant.

When a firm makes an action that takes it closer to a market, incumbent firms would profit from knowing whether such threat is to be taken seriously – and one that incumbents could do something about – or a bluff – that incumbents could ignore. Thus, in the second essay, I estimate the probability of a serious (vs. a bluff) threat as a function of market characteristics as well as the characteristics of the potential entrant and those of incumbents and the structure of their market network. In line with the awareness-motivation-capability framework, I argue that a threat is more (less) likely to be serious (bluff) when the potential entrant has the motivation to enter the market as well as the capability of doing so. This study provides insights for managers of incumbent firms on how to more effectively and efficiently allocate limited marketing resources over time to defend ‘their’ markets – or do nothing – in the face of a rival’s threat of entry.

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