Abstract

Despite their prevalence and significance, competitive wars have received limited attention from the strategy literature. Our knowledge of how inter-organizational linkages influence competitive wars is particularly lacking. Drawing on the social embeddedness perspective, we argue that both direct linkages (i.e., strategic alliances) and indirect linkages (i.e., common ownership ties and common analyst ties) reduce the likelihood of war, thereby functioning as the glue that binds firms together. Yet once competitive wars are launched in related markets, indirect linkages through common third parties may continuously function as glue, reducing the likelihood of war spillover, whereas direct linkages, such as strategic alliances, may facilitate the spillover of competitive wars, akin to adding gasoline to a fire. Using data from the U.S. domestic airline industry between 1991 and 2010, our empirical evidence offers strong support for our predictions.

Keyword

Competitive Strategy ;  Competitive dynamics ;  Topic Areas ;  Strategic Management

Abstract

This study investigates the role of self-enforced and third party-enforced interorganizational relationships (IORs) in influencing the spillover of price wars. Unlike previous research that emphasized economic factors (e.g., demand fluctuations and firm financial health) that precipitate price wars, this study underscores the relational aspect of price wars. Specifically, we argue that although self-enforced and third party-enforced relationships among competitors may both reduce the likelihood of price wars; once a war has started, third-party- enforced relationships will reduce the likelihood that a price war will spread into additional markets, while self-enforced relationships will increase the likelihood of such spillover. Using data from the United States (US) domestic airline industry from 1992 to 2010, our empirical evidence offers strong support for our predictions. By signifying the importance of IORs in the spillover of price wars, we hope to contribute to research on interorganizational relationships, as well as research on competition.

Keyword

Abstract

Recent research has shown that managers in publicly traded companies facing earnings pressure-the pressure to meet or beat securities analysts' earnings forecasts-may make business decisions to improve short-term earnings. Analysts' forward-looking performance forecasts can serve as powerful motivation for managers, but may also encourage them to undertake short-term actions detrimental to future competitiveness and performance. To identify whether managerial reactions to earnings pressure suggest evidence of intertemporal trade-offs, we explored how companies respond to earnings pressure under different conditions of corporate governance that shape the temporal orientations of managers. Using data on competitive decisions made by U.S. airlines under quarterly earnings pressure, we examined the effect of earnings pressure on competitive behavior under different ownership structures (ownership by long-term dedicated investors versus transient investors) and CEO incentives (unvested incentives that are restricted or unexercisable in the short term, versus vested incentives). The results suggest that companies with more long-term-oriented investors and long-term-aligned CEOs with unvested incentives are less likely to soften competitive behavior in response to earnings pressure, relative to companies with transient investors and CEOs with vested, immediately exercisable stock-based incentives. Using a difference-in-differences (DiD) specification for stronger identification, we also found that firms respond to their rivals' earnings pressure shocks by increasing capacity and prices, particularly when those rivals do not have long-term-oriented investors and CEO incentives. The evidence is more aligned with the view that the pursuit of short-term earnings as a result of earnings pressure may be detrimental to long-term competitiveness.

Keyword

airline industry ;  AIRLINE INDUSTRY ;  corporate governance ;  earnings pressure ;  EMPIRICAL-ANALYSIS ;  EXECUTIVE-COMPENSATION ;  FIRM PERFORMANCE ;  INSTITUTIONAL INVESTORS ;  MULTIMARKET CONTACT ;  RADICAL TECHNOLOGICAL-CHANGE ;  RISK-TAKING ;  SECURITIES ANALYSTS ;  STOCK-OPTIONS ;  strategic behavior