by Venkatesh Shankar
This article was published in Marketing Science, 16 (3, 1997), 271-293.
Pioneers’ marketing mix reactions to new entries are recognized as important determinants of the outcome of pioneer-late mover competition, particularly in price-inelastic markets such as those for pharmacueticals, cigarettes and luxury goods. Managers in such markets are interested in better understanding when to accommodate (i.e., decrease marketing spending) or retaliate (i.e., increase spending) in non-price marketing variables such as advertising and salesforce. In addition, the reallocation of marketing resources toward advertising (indicated by a pull strategy) or salesforce (indicated by a push strategy) upon entry is strategically important to managers. Previous theoretical research shows that pioneers should retaliate rather than accommodate in both static and growing markets. Results from empirical research are mixed in that they support both accommodation and retaliation in growing markets. Empirical research also shows that a pioneer accommodates (retaliates) with its low (high) elasticity marketing mix variable. Contrary to prior research, however, some pioneers have successfully accommodated late movers in growing markets, and in some cases, have accommodated with their stronger marketing mix variables and also retaliated with their weaker marketing mix variables. For example, Bristol Myers Squibb’s Capoten accommodated the entry of Merck’s Vasotec in the growing ace-inhibitors market with its more powerful variable, salesforce, but also retaliated with its less potent variable, advertising, and has been very successful. Moreover, not much is known about how the pioneer’s marketing mix allocation should change (i.e., toward pull vs. push strategies) in response to new entries. We seek to better explain the pioneer’s reactions to new entries and predict its shift in marketing mix allocation upon new entry. We note that prior research’s predictions on the pioneer’s marketing mix reactions are based on a limited number of key factors such as product-market characteristics and the pioneer’s elasticities prior to a new entry. In this paper, we extend previous research by adding two other critical factors, namely, the impact of new entry on the pioneer’s elasticities and margin, and different competitive game structures (e.g., leader-follower competition) to better predict and explain the pioneer’s marketing mix reactions. We develop analytical results on the pioneer’s reactions in price, advertising and salesforce in different competitive games (both Nash and different leader-follower games) between the pioneer and a late mover. In these results we identify the conditions under which the pioneer should accommodate, or retaliate, or not react to a late mover’s entry, and shift its marketing mix allocation toward pull vs. push strategies. We empirically illustrate some of the analytical results using data from a pharmaceutical category.