Entrant Integrative Capability and Incumbent Bias

Abstract

In practice, new entrants often bypass intermediary retailers and engage in direct competition against incumbents. However, this might place entrants under the burden of integration costs. This paper models the strategic interactions between an incumbent and an entrant, incorporating the integration cost incurred by the entrant and the associated estimation bias exhibited by the incumbent. In the baseline setting with an unbiased incumbent, we find that the entrant’s higher integrative capability (i.e., lower integration cost) always hurts the incumbent, and can even hurt the entrant itself. We further investigate how the incumbent’s estimation bias affects firm performance, and find that increasing the bias can actually benefit the entrant and, intriguingly, the incumbent as well. In particular, a mutually beneficial situation can emerge where a higher level of bias potentially improves profits for both the incumbent and the entrant. Additionally, we extend our analysis to settings with random integration costs, where the bias can be linked to either the mean or the variance of these costs. Our findings offer practical implications for entrants in choosing their integrative capability strategy, and for incumbents in deciding whether to pursue bias reduction.