Saturday, February 7, 2015

Using Evolutionary Game Theory to Deter Competitor Market Entry

Companies that innovate lead the market but often attract market chasers that seek to gain financial benefits of producing similar products. For organizations that have invented new products and services this can be an annoying aspect of doing business if high profits must now be shared with other market entry companies. To avoid easy access by competitors a company may desire to use a deterrence or shakeout strategy.

A study in the Journal of Academy of Marketing Science discusses how evolutionary game theory is used to understand whether a deterrence strategy and a shakeout strategy are more successful in keeping new businesses of out the market (Homburg, et. al, 2013). The method a company uses will determine whether or not they will be effective in ensure the costs are too high for other firms to pursue.

A deterrence strategy seeks to block potential competitors from entering the market. Strategies may include limit pricing, raising switching costs, new innovations, blocking access to suppliers and sales channels. Through this method the organization seeks to lock up the potential cost effective methods of conducting even before the new company moves into the market.

Shakeout strategy seeks to squeeze out competitors once they have entered the market. This strategy use predatory pricing, luring customers with deals, comparative advertising, soaking up market share and other methods that leave the market unprofitable for the competitor. When this occurs over time the competitor may opt to move out of the market and adjust their investment strategies. 

The shakeout strategy appeared to be more cost effective by helping to ensure that company expenses once entering the market are high and their profit margins lower. This effectiveness is based on the optimal costing strategy of comparative effectiveness of the two strategies. The use of deterrence is still a solid strategy but only under circumstances where maneuvers can create cost effectiveness. 

Homburg, C. et. al. (2013). Incumbents’ defense strategies: a comparison of deterrence and shakeout strategy based on evolutionary game theory. Journal of the Academy of Marketing Science, 41 (2).

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