Market Dominance as a Precursor of a Firm’s Failure: Emerging Technologies and the Competitive Advantage of New Entrants

Abstract:

New entrants in many industries are able to challenge the business of historically dominant firms. In many markets, dominant players have pursued pricing and service policies that, although once highly effective, now make their markets attractive targets for aggressive new entrants. The entrants’ strategies rely on lower overhead costs, new technologies, alternative distribution channels, and the active targeting of profitable customers. Several factors will make it possible for entrants to attack dominant players; simplistic historical pricing mistakes or policies of promising or providing universal service will make it attractive for new entrants to attack. Restrictions on the flexibility of incumbents—both externally and internally imposed—may make it difficult for dominant players to defend themselves effectively against attack by more flexible entrants with cream-skimming strategies and newer technology. We develop a set of alternatives for incumbent firms facing increasing “contestability” in their markets and the threat of agile entrants.

Key Words and Phrases:

• banking
• contestability
• death spiral
• dominant firms
• insurance
• market entry
• market segmentation
• strategic use of information

Additional information

Notes on contributors

Eric K. Clemons

Eric K. Clemons. See Special Section Introduction.

David C. Croson

David C. Croson is Assistant Professor of Operations and Information Management at The Wharton School of the University of Pennsylvania. He was awarded a B.S. and an M.S. by The Pennsylvania State University, and an A.M. by Harvard University, and is currently a Ph.D. candidate in business economics at Harvard University. His research interests include the economics of dominant firms, business transformation and reengineering, and the strategic use of information.

Bruce W. Weber

Bruce W. Weber. See Special Section Introduction.