Multipoint competition, market rivalry and firm performance: A test of the mutual forbearance hypothesis in the United States airline industry, 1984--1988

Javier Gimeno, Purdue University

Abstract

This dissertation tests the effects of multimarket competition on the rivalry experienced by firms in their market positions, and on their financial performance. Sixteen hypotheses were tested in a sample of competitors in 3,171 city-pair markets during 1984-1988. A simultaneous equation model and panel data methodology are used to test these hypotheses, with controls for market structures, and intramarket firm positions, firm's costs within each market, and unobserved heterogeneity. The mutual forbearance hypothesis suggests that multipoint competitors are able to improve their performance by reducing rivalry with other multipoint competitors. The first two hypotheses suggest that such an effect on financial performance should be observable, and that the relationship should be completely mediated by the rivalry effect. Both hypotheses are supported, which provides validity for the mutual forbearance hypothesis. Fourteen moderator hypotheses to the relationship between multimarket contact and rivalry are tested next. The first set of six hypotheses relate to factors that facilitate the recognition of extended interdependence among multimarket firms, thus increasing the forbearance effects of multimarket contact. These factors are: saliency of the rival's (H3) and the focal firm's (H4) position in the contact market, relatedness between focal and contact market (H5), actual contacts, rather than potential (H6), contacts with incumbents, rather than potential entrants (H7), and contacts with strategically similar organizations (H8). Hypotheses 3, 4, 5 and 6 are supported, while 7 and 8 are not. The second set of eight hypotheses test factors which encourage the exercise of extended interdependence, and determine the efficient flow of market power among markets. According to Bernhein and Whinston (1990) and Wegberg and Witteloostuijn (1992), power is obtained in contact markets without single-market competitors (H10), with high concentration (H12), with high demand growth (H14), and, for potential multimarket contacts, with easy entry (H16). Multimarket power should have the greatest forbearance impact in markets without single-market competitors (H9), moderate concentration (H11), low demand growth (H13), and, for contacts with potential entrants, when entry into the market is easy (H15). Hypotheses 10, 12 and 14 are supported, 11 and 16 receive partial support, and 9, 13, and 15 find no support.

Degree

Ph.D.

Advisors

Woo, Purdue University.

Subject Area

Management|Business community|Business costs

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