Class Notes 9

Competitive Interactions

Momo Deretic
Sauder School of Business
 Main points
Lecture 7 says international location strategy
depends on four factors
-factor advantages
-PlEoS
-trade costs
-market size
This lecture says we need to take into
consideration interactions of competitors FDI
decisions, although it is NOT the critical factor. 2
0. Introduction
1. Should competitors stay together or
separately? (Space dimension) Strategic
complementarity
Marketing-crowding effects
Agglomeration effects
Two normal-form games
2. Timing of entry decisions (Time dimension)
First Movers Effects
First-mover advantages
Second-mover advantages (fast-followers
advantages)
One game involving several effects
3. Summary
Introduction Space factors Time factors Summary

KFC and McDonalds in China

KFC
1987
the 1st store in Beijing
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 China
McDonalds
1990 the 1st store in Shenzhen
1992 the largest store of McDonalds of the
world in Beijing
Now 680 stores in China
Introduction Space factors Time factors Summary

KFC(1987)

McDonald
Shenzhen
(1990)
Introduction Space factors Time factors Summary

Location Choices for

McDonald and KFC
A symmetric case
KFC
Beijing Shenzhen
McDonald

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 Summary

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.
7
Introduction Space factors Time factors Summary

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 Summary

Location Choices for

McDonald and KFC
When locating together beats locating separately
KFC
Beijing Shenzhen
McDonald

Beijing 8, 8 5, 5

Shenzhen 5, 5 10, 10

There is no conflict between the interests of

the two firmsThis set of payoffs is a
coordination game.
Introduction Space factors Time factors Summary

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 Summary

Location Choices for

McDonald and KFC
When Shenzhen is a better place
KFC
Beijing Shenzhen
McDonald

Beijing 5, 5 8, 10

Shenzhen 10, 8 7, 7
Different locations are better than co-location in Shenzhen.
Whoever moves first will choose Shenzhenand earn higher
profits! This is an example of a first-mover advantage.
Introduction Space factors Time factors Summary

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

Features
No competitormonopolisthigh profit margin
high market shares
Introduction Space factors Time factors Summary

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

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 product
First mover already taught local workers about modern
production
First mover already settled legal issues with local
government
Copying first movers successful decisions helps
second-mover lower risk of making bad choices in an
unfamiliar environment
Introduction Space factors Time factors A general game Summary

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
 Major Takeaways
1 interaction of competitors FDI decisions
Oligopolistic reaction
2 time dimension advantages
First-mover advantages
Second-mover advantages
3 spatial factors (strategic complementarity)
Market-crowding effects (pre-emption)
Agglomeration effects (informational herding,
information spill-overs, specialized labor
4 games