Competitive Pressure Systems: Mapping and Managing Multimarket Contact

Recent research on multimarket contact — the partial overlap of two firms’ geographic or product markets — has stimulated new thinking about how and why firms put pressure on each other.1 Not surprisingly, overlaps put pressure on competitors and escalate the rivalry between firms in chess-like matches for control.2 But under certain conditions, overlapping markets can also create reciprocal threats that cause firms to reduce their rival-rous behavior.3 By exchanging footholds (moderate market share positions) in one another’s important markets, two firms can create “mutual forbearance” — a lesser propensity to attack each other with aggressive price, advertising or innovation wars for fear of damaging counterattacks in other important markets — and a greater inclination to seek growth in nonoverlapping markets.4

Most firms don’t do a good job of managing, through competitor and market selection, the pressure they experience. All organizations sense pressure intuitively, but it is often difficult to see the overall pressure system — a complex, shifting pattern of overlapping contacts among rivals that continually alters the climate of an industry by changing the incentives for players to compete, mutually forbear or even formally cooperate. Fortunately, these systems can be mapped and, unlike weather pressure systems, controlled to a significant extent if they are understood well enough.

Typically, the competitive pressure within an industry is thought of as a continuum, running from hypercompetition to collusion. An industry’s competitiveness is traditionally measured by antitrust experts using an industry’s concentration ratio or Herfindahl index, both based on the distribution of the market shares of firms within the industry. But recent multimarket research indicates that competitive pressure is more complicated than that. Overlaps between different pairs of competitors vary widely, reducing or escalating rivalry differently. And pressure is “asymmetrical”— that is, the pressure firm A places on firm B does not necessarily equal the pressure that firm B puts on firm A, because their overlapping markets may differ in importance to each one’s portfolio.5 Each firm in a system is uniquely affected. Some are targets, whereas others are aggressors or orchestrators of the overall pattern of pressure. Still others are isolated from the brunt of pressure. With all the possible combinations of overlaps that can exist between numerous rivals, no two pressure systems are exactly alike, even if the traditional measures of industry competitiveness are identical.

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References

1. R.A. D”Aveni, “Strategic Supremacy: How Industry Leaders Create Growth, Wealth and Power Through Spheres of Influence”