Incumbent Repositioning with Decision Biases

Abstract

Incumbent firms often reposition themselves in response to competitive entrants, but when doing so the firm incurs repositioning costs. To model strategic interactions between incumbents and entrants this article proposes an approach that incorporates both repositioning costs and associated decision biases, which have been identified in the economics and strategy literatures as critical aspects of strategic change, but have been largely ignored in game-theoretic treatments at the strategy level. Using formal models, we analytically characterize the impacts of repositioning costs and 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.