Abstract
The reasons and motives for diversifying into new geographical or product markets differ. The motive for entering multiple markets may be to realize economies of scope in production or administration that result from learning effects or the better use of indivisible resources.4 There may also be economies of scope in demand resulting from the existence of umbrella effects or switching costs5. The inadequacy of external capital markets may induce firms to expand their business in order to create an internal capital market.6 Multimarket operation may be efficient because it reduces the number of market transactions.7 There may also be managerial preferences for growth which — after growth opportunities in the core business have been exploited — can be satisfied only by diversification.8
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References
See i.e. Panzar / Willig (1977), for the conceptual framework and Bailey / Friedländer (1982) or Teece (1980) for extensions. See also Porter (1985), chapter 9; Scott (1993) chapter 1; and Cowling (1980).
See Cabral (1988) for the issue of umbrella branding. A similar topic is touched on by Andersson (1998), who explains that in a infinite game framework multiproduct firms will enjoy an advantage from a reputation for high quality. See Klemperer (1992) and (1995) for the concept of switching costs
See Williamson (1975), p. 143 – 148, Scott (1993), p. 12.
See Williamson (1981).
See Müller (1969), Jensen (1986).
See Edward (1955) and Bernheim / Whinston (1990). See also Axelrod (1981) who stresses that cooperation between rivals can be reduced by fostering specialization, hence avoiding regular interaction between competitors.
For example, if competitor’s costs are stochastic and a firm receives a signal about the size of costs, several signals in different market might increase the signal’s precision. A similar argument, but with stochastic demand, can be found in Gal-Or (1988).
There are two reasons, why multimarket contact increases firms awareness of capabilities or actions of a rival: firstly, when collecting competitors information, multimarket rivals usually receive greater attention than one-market competitors. Secondly multimarket competitors have more prior experiences — in competitive engagements, which are captured in the collective memory of firms as “war stories” (see Weick (1995).
See Porter (198), p. 354.
See Porter (1985) and Karnani / Wernerfelt (1985) for these examples.
See Spagnolo (1996).
Recent literature suggests that mutual forbearance is facilitated by multimarket contact both by a better understanding of rivals’capabilities (familiarity) and by increased retaliation possibilities. However, in accordance with “traditional” forbearance theories, I will discuss the concept of mutual forbearance only in the light of mutual (entry) threats.
See Heberle (1948).
For example Scherer/ Ross (1990), Porter in his discussion about the necessity of a horizontal strategy (1985) and Bernheim / Whinston (1990).
See, for example, Kamani / Wernefelt (1985), Chen (1996) and Gimeno / Woo (1996).
See for example Barnett (1993), Baum / Korn (1996).
This happened for example in the tire industry, where Goodyear reacted to Michelin’s invasion in 1969 in its North American home market by entering the European market. Other examples are Maxwell’s attack on the stronghold of Folger as a reaction to Folger’s invasion of Maxwell’s home market. (See Karnani / Wernerfelt (1985) for these examples.)
Note, that a corporate view of one market strategies is necessary without any inherent linkage (cost or demand) between markets.
See, for example, Baum / Korn (1999). See also Burt (1980) who documented in the field of network theory the relative advantages of high degrees of interconnectedness among network actors.
See Jayachandran / Gimeno / Varadarajan (1999) for an overview.
See Edwards (1955) for this concept.
See also Teece / Pisano / Shuen (1997) for this argument.
See Alexander (1985), Feinberg (1995) and Gimeno / Marin / Woo (1998) for the impact of concentration on intensity of compensation.
The approach of conjectural variations is for example used by Venables (1990). A critique of this approach can be found in Tirole (1993),p. 244 – 245.
See Kantarelis / Veendorp (1988). A problem of this approach is that the restrictions of strategy spaces are exogenous to the model, so that it is unclear why firms behave in this way.
One important exception is Harrington (1987), who analyzes the conditions for stable collusionin a framework of a finitely repeated game.
In contrast to cartel agreements, each firm decides independently about its supply. The choice of a “soft” strategy such as a high price or low supply is the result of individual rational decision making.
See also Pinto (1986) who anticipated their results when there are asymmetric cost conditions, and Bae (1989).
See for example Boehnlein (1995) for horizontal product differentiation, Häckner (1994) for vertical differentiation, Kesteloot (1987) for (dis)economies of scope in demand.
See Spangolo (1996).
See especially Philipps / Mason (1992).
Scott (1982, 1992) and Baum / Korn (1999) additionally showed, that firms may intentionally develop multimarket contact by diversifying into similar industries than their competitors.
See Whitehead (1978), Rhoades / Heggested (1985), and Mester (1987).
See, for example, Feinberg (1985), Hughes / Oughton (1993) and Scott (1982, 1989, 1991).
Further empirical work supporting the forbearance theory was done, for example, Boeker et al. (1997) and Fernandez / Marin (1998).
See, for example, Sandler (1988), Singal (1993), Evans / Kessides (1994), Gimeno / Woo (1996), Baum / Korn (1996, 1999).
See Parker / Röller (1995).
See Jans / Rosenbaum (1996).
See Frese (1993), p. 5.
See Chandler (1962), who characterized these two extreme forms. Oliver Williamson (1970), pp. 120 f, described the M-form as a complex organization that consists of a number of self-contained, semiautonomous divisions, each grouped by reference to some set of criteria (product line, technologies, geography etc.). The counterpart, the U-form is decribed as functionally and hierachially organized, where decisions are taken centrally.
See also Bühner (1993) and Frese (1995), p. 88 for the practical relevance and importance of profitcenter organizations when firms grow in size.
See Albach (1989), p. 19; Milgrom / Roberts (1992), p. 79.
See Goshal / Westney (1993), p. 11.
See the literature overview in the specific sections.
However, as the existence of resource or market interdependencies play an important role so far as the influence of organizational structures on strategic choices is concerned, the topic of coordination and its impact on internal efficieny will also be implicitly considered.
See Frese (1993) p. 4.
See the next section for a literature overview.
This issue is the focus of the principal — agent literature, which will be briefly discussed below.
See for example Schelling (1960), p. 123 ff.
Schelling (1960) also points out the role of identification and mediation.
Schelling (1960), p. 122, 124 claims that commitment to a move is equivalent to moving first.
See Schelling (1960), p. 142 for the role of delegation as a commitment device.
Sklivas (1987) and Fershtman / Judd (1987) where among the first who analyzed the strategic effect of delegation.
See Bulow / Geanakoplos / Klemperer (1985) for the concept of strategic substitutes (complements).
This was the idea developed by Sklivas (1987) and Fershtman / Judd (1987). For an empirical analisis of the influence of product market competition (strategic substitutes vs. strategic complements) on the pay-per-performance sensitivity of top management compensation see Kedia (1998).
See Allen (1998).
See Polo / Tedeschi (1992). See also Aggarwal / Samwick (1998), who allow contracts which depend positively on rivals’ profits and empirically test the hypothesis that this leads to less rigous competition.
For example Salomon Brothers in 1990 introduced a compensation scheme, which combined divisional performance measures and the companies market value (stock) as a basis for managers evaluation. See Milgrom / Roberts (1992), p. 11.
Vgl. Faulli — O11er / Giralt (1995).
The use of cost allocation schemes for strategic purposes in multi-product firms was first analyzed by Gal-Or (1993). She showed that it might be profitable for firms that are active in an oligopolistic, as well as in a completely competitive, market to allocate less cost to the division serving the oligopolistic market in order to induce less aggressive reactions by the competitor.
The possibilty of endogenizing the timing strategy was first addressed by Hamilton / Slutzky (1990).
Lorsch / Allen (1973), p. 7.
See Frese (1993), p. 29 – 30, 36 for the problem of “decision-interdependency” and the role of information when decisions are interdependent.
Organizational theorists mostly only see the (positive) effect of information on internal coordination (see i.e. Frese (1993)). They neglect the effect on competitors.
Computer-based information systems have for example been introduced in West LB, in Deutsche Lufthansa AG, in Hoechst AG and in retailing firms like Toys “R” Us, Benneton and The Gap . See contributions in Behme / Schimmelpfennig (1993) and the overview in Anand / Mendelson (1997) for examples.
See for example Piechota (1993), p. 86, Picot / Reichwald (1996), p. 135, 184.
See Albach (1969) for an overview. See also Marshak / Radner (1972) or more recent publications by Keren / Levhary (1987), Radner (1992) and (1993), Kennedy (1994).
See Hart / Holmström (1987) for a survey of this literature.
ee, for example, Aggarwal / Mandelker (1987) on financing decisions, and Lambert (1986), Campbell / Chan / Marino (1989), Smith / Watts (1992), Hirshleifer / Suh (1992), Bizjak / Brickley / Coles (1993) on investment behaviour.
See for example Lambert / Larcker (1988), Sloan (1993) or Bushman / Indjejikian (1993).
See i.e. Gal-Or (1995) or Aghion / Tirole (1995). See also Sridhar / Balachandran (1997) for a discussion about information structures and their impact on the boundaries of firms.
See Hart (1983), Hermalin (1992) and (1994) or Scharfstein (1988) for the influence of competition on managerial slack. Horn / Lang / Lundgren (1994) and Hermalin (1994) the strategic interactions of firms. In these papers, owners can delegate a task to managers, who invest in cost-reducing effort, but the owners will still play the market game.
See previous section.
The assumption that managers maximize the objective function proposed by owners can also be justified empirically. Murphy (1998) shows that compensation of top managers in most cases depends — in addition to other performance measures — linearly on accounting based profits and on shareholder value. Additionally, research enriching the simple principal-agent model suggests a minor role for input based incentive schemes and a increased benefit of tying salary to principals’ objectives (see Murphy, (1998), p. 29 for this argument). It also leads to incentive structures that are linear rather than convex or concave (Holmström / Milgrom (1991), Hart / Holmström (1987)).
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Neubauer, S. (2001). The impact of multimarket contact on the strategic behavior of firms. In: Multimarket Contact and Organizational Design. Beiträge zur betriebswirtschaftlichen Forschung, vol 97. Deutscher Universitätsverlag, Wiesbaden. https://doi.org/10.1007/978-3-663-05979-0_2
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DOI: https://doi.org/10.1007/978-3-663-05979-0_2
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