Ashutosh Dixit & Pradeep K. Chintagunta
Executive Summary
The authors investigate firms’ exit behavior from markets. On the basis of extant literature in economics, strategy, and marketing, they identify market- and firm-specific factors that influence exit behavior. In characterizing the probability of a firm exiting a market, the authors account for firms’ uncertainty about a market’s true attractiveness before entry and firm learning about a market’s true attractiveness after entry. For example, marketing managers make market entry decisions even when the available information is limited or uncertain. This requires marketing managers to reevaluate market attractiveness and decide whether to continue in or exit a market, possibly with a formal model of firm learning.
The methodological approach posits that at the time of market entry, a firm has an initial belief about a market’s attractiveness. After entry, actual observed demand during each period provides information about true (intrinsic) attractiveness. The firm then updates its belief in a Bayesian fashion. Depending on its current beliefs about intrinsic attractiveness, as well as other firm- and market-level factors, the firm decides either to continue for one more period or to exit the market. By estimating both initial belief about attractiveness and true attractiveness, this approach helps determine whether firms use market information to update their beliefs about market attractiveness.
The authors empirically investigate the market exits of new entrant discount airlines from city-pair markets. The results show that airlines’ prior beliefs about market attractiveness are not necessarily consistent with the market’s true intrinsic attractiveness and that firms learn about the true market attractiveness over time. For some airlines that subsequently went bankrupt (e.g., Vanguard), the authors find that, on average across markets, the true market attractiveness was lower than the perceived initial attractiveness.
Furthermore, a combination of several market and firm factors influence exit. Gate controls at the airport strongly influence exit probabilities. Prices and costs are important control variables and must be managed carefully to enable survival. Costs are more important than prices in this regard. The choice of hubs also is crucial to the survival of an airline in a market, so choosing an appropriate hub city should constitute an integral part of the airline’s strategic market plan. For example, the main difference between ValuJet’s and AirTran’s strategies was that ValuJet used Atlanta, the hub of a major carrier (Delta), whereas AirTran moved its hub to Orlando, which is not a Delta hub. By not competing with the major carriers head-on, discount carriers may have a better chance of success.
The authors also provide model comparisons with extant approaches to studying market exit and find that the proposed approach provides better fit and predictive ability. The methodology used in this study can be adapted to study other exits or failures, such as new products, television shows, or agency–client relationships.
Biography
Ashutosh Dixit is an Assistant Professor of Marketing in the Nance College of Business at Cleveland State University. He is interested in studying the evolution of discounters and price competition in the airline industry. His research also includes ecological perspectives in marketing, competition issues, pricing, electronic commerce, international marketing, and marketing education.
Pradeep K. Chintagunta is Robert Law Professor of Marketing in the Graduate School of Business at the University of Chicago. He is interested in studying strategic interactions among firms in vertical and horizontal relationships. His research also includes measuring the effectiveness of marketing activities in pharmaceutical markets, investigating aspects of technology product-markets and the analysis of household purchase behavior; and measuring the effectiveness of marketing activities in the entertainment industry.
Journal of Marketing, Vol. 71, No. 2, April 2007
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