What factors affect the likelihood a firm will initiate a competitive response to the action taken by a competitor?
There are a number of factors that determine whether a firm will take such action. They include:
The degree to which the competitor’s actions matter. Firms will only respond if the competitor’s action is likely to erode their own market share or profitability.
The degree of “market commonality.” If the two firms compete in many markets, they are less likely to want to get into a war with one another. This means a firm will be less likely to react. Firms that only compete in one market have more to lose and must therefore fight back.
The reputation of the competitor. If the competitor has a good reputation, the firm will be more likely to respond. A competitor with a bad reputation is not nearly as much of a threat.
The availability of resources. Firms that have ample resources are more likely to respond than those that do not. This will be particularly true of responses to strategic actions, which are more costly to implement than reactions to tactical moves.