1

Chapter 9 Competitive Interactions

Keith Head

Sauder School of Business

2

The “take-away” for this chapter

• Chapter 7 says international location strategy depends on four factors

-factor advantages

-PlEoS

-trade costs

-market size

• Chapter 9 says we need to take into consideration interactions of competitors’ FDI interactions of competitors’ FDI decisions, decisions, although it is NOTNOT the critical factor.

3

Road Map0. Introduction 1. Should competitors stay together or

separately? (Space dimension)• Marketing-crowding effects• Agglomeration effects• Common ground of preferences Two normal-form games

2. Timing of entry decisions (Time dimension)

• First-mover advantages• Second-mover advantages (fast-follower’s

advantages) One extensive-form game

3. One game involving several effects4. Summary

4

China Retail MarketIntroduction Space factors Time factors A general game Summary

5

China Retail Market• Based on 2005 estimation, China is the 7th

largest retail market in the world.

• Now Wal-Mart (US world 1st), Carrefour (France world 2nd), and Metro (Germany world 3rd), have come and competed in China market.

• Wal-Mart 19961996 the 1st super-center in ShenzhenShenzhen 2006 56 stores in China• Carrefour 19951995 the 1st hyper-store in BeijingBeijing 2006 70 hypermarkets and 225 discounts• Metro 19961996 the 1st store in ShanghaiShanghai 2006 30 discount, cash-only stores

Introduction Space factors Time factors A general game Summary

6

Introduction Space factors Time factors A general game Summary

Wal-MartWal-MartShenzhen

MetroMetroCarrefouCarrefou

rr

7

Great Success of KFC in ChinaIntroduction Space factors Time factors A general game Summary

8

KFC and McDonalds in ChinaKFC 19871987 the 1st store in BeijingBeijing 1992 10 stores in China 1995 up to 71 stores 1996 the 100th store was set up stead-development stage Now more than 1400 stores in ChinaMcDonalds 19901990 the 1st store in ShenzhenShenzhen 1992 the largest store of McDonalds of

the world in Beijing Now 680 stores in China

Introduction Space factors Time factors A general game Summary

9

Introduction Space factors Time factors A general game Summary

McDonaldMcDonaldShenzhen

(1990)

KFC(1987)KFC(1987)

10

Knickerbocker’s framework• Oligopolistic Reaction (OR) is defined as

The decision of one firm to invest overseas raises competing firms’ incentives to invest in the same country.

• Key points of oligopolistic reaction– Oligopoly– Uncertainty of the overseas production

costs– risk aversion

Introduction Space factors Time factors A general game Summary

11

Location Choices for McDonald and KFC

A symmetric case

KFCBeijing Shenzhen McD

on

ald

Beijing 5, 5 10, 10

Shenzhen

10, 10 5, 5•Indifferent between two locations

•Firms want to avoid each other.

Introduction Space factors Time factors A general game Summary

12

Market-crowding effects• “Market-crowding” effects When there is a nearby

competitor, the company has to charge a lower price and surrender market share.

-lower market share harder to cover fixed costs

-lower profit margins on each sale.

-input prices pushed up or scarce “spaces” taken.

Introduction Space factors Time factors A general game Summary

13

Introduction Space factors Time factors A general game Summary

Market-crowding effects

• Trade costs insulate a firm from competition from a distant rival.

14

Location Choices for McDonald and KFC

• The previous pay-off form shows that the two firms avoid choosing the same local marketspatially separate themselves

• What kind of pay-off forms are possibly consistent with the “matching location” phenomena?

Introduction Space factors Time factors A general game Summary

15

Location Choices for McDonald and KFC

When locating together beats locating separately

KFCBeijing ShenzhenM

cDon

ald

Beijing 8, 8 5, 5

Shenzhen

5, 5 10, 10

There is no conflict between the interests of the two firms—This set of payoffs is a “coordination game”.

Introduction Space factors Time factors A general game Summary

16

Agglomeration economies• How could they benefit from locating

near each other?– Information sharing/spillover– Encourage input suppliers to set up

in the same area• “Agglomeration economies”-efficiency

gains by staying together E.g. Silicon Valley, Hollywood• Low market-crowding effect +strong

agglomeration economies co-location

Introduction Space factors Time factors A general game Summary

17

Does it make sense to “match a rival’s move”?

Market-crowding effects Low together

–In the goods market

–In factor markets

Agglomeration effects High together

–More information sharing (industry-level externality)

–Stimulate more suppliers to set up nearby

Common ground of preferences High together

-similar targeted consumers (market segments)

-similar factor intensities

Introduction Space factors Time factors A general game Summary

18

Location Choices for McDonald and KFC

• When Shenzhen is a “better” place

KFCBeijing Shenzhen McD

on

ald

Beijing 5, 5 8, 10

Shenzhen 10, 8 7, 7

•Different locations are better than co-location in Shenzhen.

•Whoever moves first will choose Shenzhen—and earn higher profits! This is an example of a “first-mover” advantage.

Introduction Space factors Time factors A general game Summary

19

Extensive-form Representation

Introduction Space factors Time factors A general game Summary

KFC

Beijing Shenzhen

McDonald

KFC

Beijing Beijing

Shenzhen Shenzhe

n

5

5

McDonald

8 10 7

10 8 7KFC

Sub-game Perfect Nash EquilibriumThis is one of the two extensive-form representations of the previous normal-form game.

20

First-mover Advantages (FMAs)

• Definition An advantage gained by the first significant

company to move into a new market

• Notice First-mover≠ long-run business success

• FeaturesNo competitor—monopolist—high profit margin —high market shares

Introduction Space factors Time factors A general game Summary

21

How could FMAs lead to long-run business success?

Channels?• Loyalty to brand• Localized and non-shared learning curve

– AC declines when cumulative output rises

• Market not large enough to accommodate two firms

• Exclusive dealing contracts– Leverage the current monopoly power to the

next period• Network economies

– e.g. Personal bank business

Introduction Space factors Time factors A general game Summary

22

Second-mover Advantages (SMAs)

• Sometimes being the first-mover has disadvantages.• What leads to second-mover advantages in

production location decisions?– Free-ride on “investments” made by the first

mover First mover already taught local consumers about

productFirst mover already taught local workers about modern

productionFirst mover already settled legal issues with local

government

– Copying first mover’s successful decisions helps second-mover lower risk of making bad choices in an unfamiliar environment

Introduction Space factors Time factors A general game Summary

23

Second-mover Advantages (SMAs)

New born chick imitates a turtle with it's shell.

Introduction Space factors Time factors A general game Summary

24

How did first movers do in China?

• Auto industry– Volkswagen (Germany) moved early and

was very successful.– Peugeot (France) also entered early and

lost money for 12 years before exiting.

• Personal care products – Proctor and Gamble entered early and

has been very successful.– Wella entered soon after and failed

Introduction Space factors Time factors A general game Summary

25

Location Choices for McDonald and KFC

Locating together beats separate location and each firm has a preferred location (The battle of the sexes)

KFC

Beijing Shenzhen

McD

onald

Beijing 10, 8 4, 5

Shenzhen5, 4 8, 10

“First-mover” advantage +matching the location

Introduction Space factors Time factors A general game Summary

26

The Battle of the Sexes

Pat

Ballet Boxing

Ch

ris Ballet 10, 8 0, 0

Boxing 0, 0 8, 10

Introduction Space factors Time factors A general game Summary

27

Summary1 phenomenon—interaction of competitors’

FDI decisionsOligopolistic reaction

2 time dimension advantages– First-mover advantages– Second-mover advantages

3 spatial factors– Market-crowding effects– Agglomeration effects– Common ground of preferences

4 games 1-2-1-2-3-43-4

Introduction Space factors Time factors A general game Summary

28

Harder to cover fixed cost

Example FC=$1000 Profit/goods=$10 minimal #=100

units Total local demand=100 units Only one firm exist; if there are two firms, equally dividing the market,

could either of them recover the fixed cost

Introduction Space factors Time factors A general game Summary