Research Summary: This study investigates incumbent responses to a main rival's exit. We argue that long-time rivals have developed an equilibrium by offering a mix of overlapping and unique products and by choosing geographic proximity to each other. A rival's exit, however, disrupts this equilibrium and motivates surviving firms to expand in both product and geographic spaces to seek a new equilibrium. Using data from all U.S. Best Buy stores before and after the exit of Circuit City, we find that Best Buy uses product variety expansion as its major response in markets where Circuit City was colocated, but it more often responds by opening new stores in non-colocated markets. Regardless of preexisting market structures, the magnitude of product variety expansion decreases with the opening of new stores. Managerial Summary: How do surviving firms respond to a major rival's exit? By studying Best Buy's responses to Circuit City's withdrawal, we find the survivor expands in both product space (increasing product variety) and geographic space (opening new stores), due to two motives. First, the survivor strives to fill in “holes” left in the market. Second, the survivor experiences uncertainty in the postexit world wherein its reference point is gone, threat of potential entry looms, and it lacks information about new entrants. Thus, it must deter potential entry ex ante by preempting many prime product and geographic locations. Best Buy also responds according to preexisting market structures, primarily through product variety expansion in markets wherein Circuit City was colocated and through opening new stores in non-colocated markets.
Bibliographical noteFunding Information:
information National Natural Science Foundation grants of China, Grant/Award Numbers: 71331004, 71832008; Mack Institute Research Fellowship, Grant/Award Number: N/AThe authors gratefully acknowledge the thoughtful suggestions provided by Editor Brian Wu, two anonymous reviewers, Ed Blair, Bruno Cassiman, Tim Folta, Betsy Gelb, Chao Guo, Jackie Kacen, Gwen Lee, Michael Leiblein, Dan Levinthal, Robert Seamans, and Sunny Sun. The authors also thank seminar participants of Wharton, Temple, Drexel, U Mass Lowell, University of Hong Kong, Peking University, and Renmin University of China for valuable comments. C.R.R. is grateful for the support of Mack Institute Research Fellowship. T.H.C. thanks the National Natural Science Foundation grants of China (71832008 and 71331004). All errors remain our own.
National Natural Science Foundation grants of China, Grant/Award Numbers: 71331004, 71832008; Mack Institute Research Fellowship, Grant/Award Number: N/A
© 2018 John Wiley & Sons, Ltd.
- incumbent responses
- market expansion
- market structure
- product variety
- rival exit