Incumbent Repositioning with Decision Biases

Abstract

Incumbent firms often reposition themselves in response to entrants, but when doing so they incur repositioning costs. Incumbent repositioning costs and the associated decision biases have been identified in the economics, operations and strategy literatures as critical aspects of the competitive interactions between incumbents and entrants, but they have received limited attention in game-theoretic treatments at the strategy level. To fill this gap, we develop a strategic mental model to analytically characterize the impacts of repositioning costs and decision biases on firms’ equilibrium strategies and profits. Including these costs and biases changes the nature of strategic dynamics as well as introduces new implications for strategic choice.