Product- and Factor Market Contact and Competitive Aggressiveness: The Moderating Effect of Competitive Intensity

Abstract

In the quest to understand the antecedents and outcomes of firms’ competitive behaviours, theories about the consequences of interdependencies have received increasing attention. While the literature on multimarket contact has contributed valuable insights, there is still limited understanding of how different types of interdependencies influence competitive behaviour. In particular, limited research has analysed the effects of factor market interdependencies. Drawing on multimarket contact and factor market competition literature, the study argues that firms refrain from competitive behaviour when they experience multimarket contact in both product and factor markets, but that this effect is stronger in the case of product multimarket contact. Identifying boundary conditions has also become an integral part of multimarket contact literature. In this vein, competition has received particular attention, with a focus on industry and market level competition. Complementing these approaches, the study builds on ecological models of competition to analyse how idiosyncratic competitive circumstances influence the multimarket contact-competitive aggressiveness relationship. The study argues that competitive intensity limits aggressive behaviour. Furthermore, it argues that competitive intensity positively moderates the relationship between product multimarket contact and competitive aggressiveness and negatively moderates the relationship between factor multimarket contact and competitive aggressiveness. The study tests these predictions on 1,276 (8,065 firm-year observations) large bank holding companies operating from 2001-2011 in the US. The empirical results suggest that different types of interdependencies have distinct implications for competitive behaviour and that idiosyncratic competitive circumstances may contribute towards understanding the boundary conditions of the mutual forbearance hypothesis. These findings contribute to the literature on multimarket contact, competitive dynamics, factor market competition and ecological models of competition. In particular, current multimarket contact literature largely focuses on the same types of contact to analyse the effect on competitive behaviour, yet the results of this study show that different types of contact may have distinct effects. In addition, the effect of industry or market level competition has received some attention, but this study emphasises idiosyncratic competitive circumstances. Specifically, the results reported here suggest that idiosyncratic competitive circumstances play a significant role in delineating the boundaries of the mutual forbearance hypothesis.