1

Hsieh, K., & Vermeulen, F. (2014). The structure of competition:

How competition between ones rivals influences imitative market
entry. Organization Science, 25(1), 299-319.
Presented to:

Title

The Structure of Competition: How Competition

Between Ones Rivals Influences Imitative Market
Entry

Unit of Analysis Organization/Firm level

Study
Foundations

BRIEF
INTRODUCTION
Herding Theory
(Banerjee 1992, & Bikhchandani et al.
1992)

Broad Question

How a pattern of encounter b/w a firms competitor

affects the mimetic behavior of a firm?

Research
methodology

Causal

Study Context

Product market entry & Geographic Market Entry

Boundary
Assumption

Applicable across different settings and forms

of market entry

Time Horizon

Longitudinal

Target Industry

Chinese pharmaceutical industry &Taiwanese computer

hardware industry

INTRODUCTION
1. Under uncertainty, firms often inclined to imitate
each others actions (Lieberman and Asaba 2006).
2. Empirical studies have predicted the influence of
imitation on diverse strategic decisions.
3. Imitation with respect to close competitor in the same
industry segment have particular scholarly attention.
4. Findings regarding imitation behaviours have been
inconclusive or even conflicting.

RATIONAL FOR THE STUDY

To show that a firms propensity to imitate or
steer away from its direct competitors is
determined by the extent and nature of rivalry
between its competitors?

EMPHASIS OF THE STUDY

Study focus is
1. How a firms mimetic behaviour is moderated by rivalry
b/w its competitor.
2. On a specific form of firm behavior market entry.
3. Competitive interactions between a firms rivals
a) Can create a herding effect, which makes mimetic entry more
likely.
b) Can decrease the mimetic behaviour because of intensified
competition.

SIGNIFICANCE OF THIS STUDY

The papers main contributions are
Examining a set of moderators, advance the literature on
imitation by revealing under which circumstances

1.
a)

b)

Firms have a propensity to imitate their direct rivals and

Under which Firms are distinctly reluctant to follow suit.

2.

Exploration of various characteristics The Structure of

Competition. that different firms in an industry face.

3.

Stimulating the possibility that other types of firm behavior

might also depend on The Structure of Competition.

The Structure of Competition

The pattern of who competes with whom in an industry
Two companies can be direct competitors when they
operate in at least one common product segment.
A company can compete with a firm for one product
but not for other.
Some direct competitors of a focal firm, might directly
compete with each other, whereas others do not. E.g..
Concern firms if meet each other in multiple segments
of the industry, it is called multimarket contact.

The Structure of Competition

This paper, compare four basic situations
1. A firm whose direct competitors, don't compete each other.
2. A firm whose competitors also encounter each other.
3. Firm whose competitors are engaged in Asymmetric
multimarket competition (subdued rivalry).
4. Firm whose competitors are engaged in Symmetric
multimarket competition (aggressive rivalry).

Examination of these situations will give insights into

a firms behaviour to mimetically enter a new market
or stay out of it.

Theory Development and Hypothesis

Competition b/w a Firms Competitors
Under uncertainty Prior market entry by a firms competitors
may be taken a signal of market attractiveness.
This creates a herding effect making the firm to follow the suit.
Herding effect will be more strong if a firms direct rivals also
encounter each other i.e. start acting as reference group.
Thus drawing the firm entering into the new market, too.
Even rational managers follow the herd to avoid reputational
risk. (Scharfstein & Stein 1990)

10

Competition b/w a Firms Competitors

The study predict that

Firms
Propensity to
Follow

Prior Entry by
Competitors
+
ve
Direct Encounters b/w
an Organizations
Existing Competitors

Hypothesis 1. The extent to which a firms direct competitors also compete

directly with each other will increase the relationship between the number of
direct competitors that have entered a particular market and the firms likelihood
of entering the same market.

11

Theory Development and Hypothesis

Asymmetric Multimarket Contact b/w Firms Competitors
Competitor's Prior entry may
1.
2.

Create a herding effect because of perceived attractiveness or

Decreased attractiveness because of competitive crowding effect.

However in case of Multimarket Competition

1. If existing competition is fierce, this rivalry may spill over into the new
market.
2. If existing competition is subdued, this behavior will be followed in new
market.
However in case of Asymmetric Multimarket Competition
two competitors
have
footholds in each others
1.When
Competition
thus becomes
moresmall
subdued,
market, anbehavior
implicit
threat
of reciprocal
retaliation
2.key Nonaggressive
toward
each other
i.e. Mutual Forbearance
results.

12

Asymmetric Multimarket Contact b/w Firms Competitors

Mutual forbearance will positively moderate the mimetic behaviour.

Firms
Propensity to
Follow

Prior Entry by
Competitors
+
ve
Direct Encounters b/w
an Organizations
Existing Competitors

+
ve
Asymmetric multimarket
competition b/w Existing
Competitors

Hypothesis 2. Asymmetric multimarket competition among a firms direct

competitors will further increase the relationship between the number of

direct. competitors that have entered a particular market and the firms
likelihood of entering the same market.

13

Theory Development and Hypothesis

Symmetric Multimarket Contact B/w a Firms Competitors
Symmetric Multimarket Contact is a condition when two
multimarket competitors depend heavily on the same segment.
When 2 multimarket competitors depend heavily on the same
segment, aggressive competition is more likely to occur.
This aggressive behavior of competitors in the past, might lead to
fierce competition in the new market too.
So the firm might choose not to join its competitors in the new
market, in an attempt to avoid rivalry.
Firm will not be inclined to imitate its competitors entry decisions.

14

Symmetric
multimarket
competition
ve

Firms
Propensity to
Follow

Prior Entry by
Competitors
+
ve
Direct Encounters b/w
an Organizations
Existing Competitors

+
ve
Asymmetric multimarket
competition b/w Existing
Competitors

Hypothesis 3. Symmetric multimarket competition among a firms direct

competitors will decrease the relationship between the number of direct

competitors that have entered a particular market and the firms
likelihood of entering the same market.

15

Methods Study 1: The Chinese Pharmaceutical Industry

Research Setting:
Domestic producers pharmaceutical ingredients during the period 1992
2001. (After economic reforms)
Data collected using Pharmaceutical Industry Yearbook.
Provided detailed production data on all drugs produced by each
manufacturer in a given year.
Population =1,634 firms,
Sample=742 firms(produced at least 2
distinct ingredients from 22 therapeutic categories).
These categories are used to identify direct competitive relationships
and market entry events.
A market entry event was defined as a firm starting to produce an
ingredient in a therapeutic category that it had not served before.
During the period 19922001, 331 of the 742 companies made 542
entries into 22 different product markets.

16

Methods Study 2: The Taiwanese Computer Hardware Industry

Research Setting:
Manufacturers of computer hardware in Taiwan.
And their direct investments of into China during the period 19992005.
Data is collected from Taiwan Stock Exchange & the Gre Tai Securities
Market.
Based on Standard Industry Classification (SIC) categories, product
markets are defined & 5 product market, categories selected.
Population =205 companies+344direct competitors companies=549
Investment data obtained from Investment Commission & Market
Observation Post System(Taiwan Stock Exchange)
A market entry move was defined as the first direct investment
made by a Taiwanese company in a particular geographic market..
During the period 19992005, 389 of the 549 companies made 650
entries into 22 different geographic markets in China.

17

Dependent Variables and Method of Analysis

Our hypotheses pertained to the likelihood that a firm enter a
specific new market, as influenced by its direct competitors prior
entries.
This entry likelihood is estimated by Coxs (1975) semiparametric
proportional hazard model i.e

be the hazard rate of entering a market at time t.

To capture the effect if a firm have entered more than one market
at the same time, model will be

18

Explanatory Variables
Sr
#

Explanatory
Variables

Measurement

Competitors
prior entry

The number of a firms competitors that had previously

entered a particular market.

Direct
Encounters b/w
a
Firms
Competitors

Number of occasions that competitors of the focal firm

also encountered each other and divided that by the
maximum number of times they could have encountered
each other. (therapeutic + SIC) categories. Figure 2
(value ranges from 0 to 1)

Asymmetric
Symmetric
Multimarket
Competition

vs. 1. Multimarket Contact b/w a firms competitors =

No. of competitors meet in multiple markets divided
by the number of times multimarket competition could
have happened. Figure 3(value ranges from 0 to 1)
2. Extent of symmetry is measured by Euclidean
distance

19

Control Variables
Sr#

Study 1

Study 2

Market relationships
between the firm itself and
its competitors.

Market relationships between the

firm itself and its competitors.

Market Exits

Market Exits

Market Density

Market Density

Market Density2

Market Density2

Market Size

Internationalization

Incumbents operating at a
loss

Wealth per capita

Excess Capacity

Market Concentration Ratio

(CR4)

Skilled labor
Transportation infrastructure

20

Hypothesis Tests: Magnitude of Interactions

Assessed the magnitude of interaction affect by taking the partial
derivates of the relative hazard with respect to the variable competitors
prior entry under different levels of direct encounters between a
firms competitors.

Study 1

Study 2

H1: An Additional competitor entry

will increase the Relative Hazard of
entry factor a by 1.04 and 1

H2: This Multipliers are 1.08

and 1.02 in study 2.

H2: Relative Hazard rate was 1.03

and 1. (Asymmetric)

Where as, this rate was 1.09

and 1.01 for study 2.

H3: relative hazard rate was 0.92.

(Symmetric)

It was 0.95.

H3: The
H1:
The Results
Results indicates
indicates that
that ainfluence
mimetic effect
of prior
of prior
entryentry
by a firms
is stronger
direct
in cases where
competitors
would
a firms
even turn
rivals
negative
also encounter
in symmetric
eachmultimarket
other.
contact
and additional entry would decrease the relative hazard rate.

Hypothesis Tests : Study 1

Hypothesis Tests: Study 2

Robustness Test and Additional Analysis

The Study created two dichotomous variables, one is the
extent of multimarket contact and second is extent to
which it was symmetric by using grid search algorithm.
In the both studies asymmetric multimarket contact
between firms direct competitors positively moderated
the relation between prior entrants and the firms entry
rate, whereas symmetric competition negatively
moderated the same relation.

Multimarket Contact Accounting for

Market Share
The study have additionally computed
symmetric and high share dependence
The symmetric and equal dependence

Multimarket Contact Accounting for Market

Share

The result indicates that firm is less likely to

enter mimetically into new market when
engaged in symmetric multimarket competition
with unequal market dependence.

Discussion
Competition may increase and decrease the firms
likelihood of mimetically entering a particular market,
depending on the structural properties.
Imitative entry is less likely when firm are engaged
head to head competition because they depend
heavily on the same segments.
When rivals hold footholds in each other segments,
and firms observe entry from this group into new
market, it is inclined to follow suit.

Level of Analysis
Furthermore, to explore whether there are additional reason why
a firms' entire structure of competition matters for imitative
entry, and not just the encounters between the subsets of prior
entrants.(they conducted 19 face to face interviews)
The interviews confirmed the that they pay attention to non
entrants because they realize several of them may soon enter
too.
Firms behavior is determined by the full set of competitors
around them, and not just the subset of prior entrants. (insights
from interviews)

Limitation and Future Research

Limitation

The study limited the analysis by

estimating structure of
competitive interactions
between a firms rivals.
The study examined structure of
competition influence into new
product market.
The study examined structure of
competition influence on firms
decision to entry mimetically.

Future Research

However, mapping all the

encounters between firms within
an industry one could find wider
structures.
Could potentially explore
geographic market structures.
The reciprocal loop can also
evaluate in the future research.

Limitation and Future Research

Limitation

The study ignored the interlock

ties, inter firm relationships and
other joint categories of social
and competitive structures.
The study wants careful
attention to generalize it,
because both selected studies
context have their limitations.
The study was not able to entirely
disentangle the various possible
effects that leads towards the
imitative behavior.

Future Research

Can examine the social ties and

competitive structure more
better understanding.
Compare the listed and non
listed firms or check the
influence of foreign and
domestic firms.
Check the different factors that
could influence when firms
observe their rivals.

33

Conclusion
The study shows that firms might either follow or
steer away from their direct competitors in the
course of market expansion depending on the pattern
of competitive relationships between their peers.
It also open up the avenue that competitive
interactions can affect other firm behaviour.