The Role of Pricing Strategy in Market Defense
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The price variable is among the most powerful instruments in the arsenal of the executives to achieve entry deterrence objectives. There are two main pricing strategies that firms may use to defend against a competitive market entry. The first of these options, limit pricing (or entry deterring price), may be utilized prior to competitive entry. The second option, aggressive (predatory) pricing, may be executed post-entry. The effectiveness of both of these options is still controversial. For example, the Chicago School proponents argue that these strategies are anecdotal in nature. On the other hand, the rationality of such conduct has been reliably simulated by Post-Chicagoans in game theoretic settings. The potential contributions of the marketing discipline have been recognized and called upon to help resolve the conflict. With this dissertation, I attempt to shed light on the role that price plays in preemptive and post-entry market defense of firms. As such, the questions tackled include but are not limited to: how effective is price as an entry-deterrence tool; in conjunction with firm and market specific barriers to entry; and as a post-entry retaliation mechanism? What are the facilitating conditions for limit, aggressive (predatory), competitive and supra-competitive pricing? What are the (long-term) consequences of these strategies? Following a multi-disciplinary literature review, I present a dynamic process model and test my hypotheses in a key network industry the airline industry. Building upon the advantages of multiple methods a la triangulation, I find that both limit pricing and predatory pricing can serve as effective strategies for the incumbents market defense. Predatory use of pricing in network industries may diminish consumer welfare. Results also suggest that firm specific barriers have a more significant role in market defense than market specific barriers. Insights and frameworks based on the marketing philosophy are also presented with the hope of advancing the ongoing debate between the Chicago and Post-Chicago Schools of thought.