Entry diversion: Deterrence by diverting submarket entry

Abstract

Research Summary Going back to Bain (1956), strategy scholars have long recognized the importance of deterring entry for sustaining incumbents' profits in an industry. We introduce a new mechanism, entry diversion, to better understand the empirical phenomenon of persistent firm entry in spite of investments in entry deterrence by incumbents in some industries. Entry diversion happens when preemptive strategic investments by incumbents decrease the expected future profits from a target submarket such that entrants choose to enter another submarket within the same industry. Empirical evidence from the global semiconductor manufacturing industry suggests that incumbents expand their capacities beyond demand growth, and that these investments effectively divert entry into other submarkets. Greenfield entrants are more responsive to entry diversion than incumbents. Managerial Summary Managers have long understood that deterring entry of new players into their industry could sustain their firms' profits. In this article, we introduce a new mechanism, entry diversion, where the incumbent diverts potential entrants from its submarket toward other submarkets in the same industry. Entry diversion happens when preemptive strategic investments by incumbents decrease the expected future profits of the entrant in a submarket of the industry such that the entrant chooses not to enter the incumbent's submarket. Contrary to entry deterrence, new players will still enter the industry but settle in different submarkets. Empirical evidence from the global semiconductor manufacturing industry suggests that incumbents expand their capacities beyond demand growth, and that these investments effectively divert entry into other submarkets.

The Great Debt Divergence and its Implications for the Covid-19 Crisis: Mapping Corporate Leverage as Power

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Does imitation increase or decrease demand for an original product? Understanding the opposing effects of discovery and substitution

“…In sum, much of the extant literature has characterized imitation as a competitive threat to the original, with past work documenting that the release of imitative products typically harms the performance of the original (e.g., Ethiraj & Zhu, 2008; Lee et al, 2000; Thurk, 2018). In response to such findings, scholars have also examined the ways in which firms can deter the entry of imitative products and limit competition (e.g., Bessen & Maskin, 2009; Li & Vermeulen, 2021; Miric, Boudreau, & Jeppesen, 2019; Reitzig & Puranam, 2009; Uzunca & Cassiman, 2020). Importantly, this past work, which has focused on the substitution effect of imitation, has examined it in markets with a relatively small number of products, where customers are either aware of all available products or can easily access this information.…”

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Incumbent defense strategies and new entrants market exit: the moderating role of relational market-based assets

“…We contribute to the growing body of literature on market entry and exit (Aghaie et al , 2022; Claussen et al , 2018; Ethiraj and Zhou, 2019; Lieberman et al , 2017; Uzunca and Cassiman, 2020) by examining the impact of price-cut and capacity expansion side by side and exploring the moderating role of RMBAs. Additionally, we control for a broad set of NE-, incumbent- and market-specific factors that could impact NEs’ exit to rule out alternative explanations.…”