A big issue that firms face these days is multipoint competition. Multipoint competition occurs when two or more enterprises encounter each other in different markets. In many instances, firms choose to cooperate with their rival firms simply because this is the smartest and safest approach. By cooperating, firms can hold each other in check and not allow one firm to gain a competitive advantage over other. If a firm chooses not to cooperate with their rival firm, several of their own markets may be affected in a negative way. The short term gains may be good, but in the end, the long term effects will be costly.
The Idea in a Nutshell
Multipoint competition, also known as multimarket competition, occurs when firms meet the same rivals in multiple markets. It is widely theorized that this will affect the intensity of competition, ultimately leading to cooperation or mutual forbearance between both competitors. The idea that firms will be less competitive if they meet in multiple markets is attributed to Simmel (1950) and Edwards (1955). Multipoint competition occurs widely throughout the business world. The most common markets multipoint competition occurs in are airlines, hospitals, banks, hotels, and computer software companies. In spite of the evidence that multimarket competition leads to mutual forbearance, it is still not totally conclusive. Research is continually being done each and every day to prove this relationship.
The Top Ten Things You Need to Know About Multipoint Competition
1. The automotive industry is a good industry to measure the effects of multipoint competition. The industry has consolidated to 12 major independent producers which operate across a number of different geographical markets. The auto industry consistently encounters competitors in the same market so this gives economist ample amounts of data to study.
2. Many of the top economists consider multipoint competition to be a negative thing. However, studies are not conclusive that multipoint competition hurts the competitiveness of the market that both firms engage in.
3. One of the negatives that may arise from multipoint competition is a theory known as mutual forbearance. Mutual forbearance is when firms support collusion across a range of markets because they recognize their interdependence.
4. A leading economist on multipoint competition was a man by the name of Corwin D. Edwards. Edwards wrote many books and also is credited for helping write a principles textbook named Economic Behavior.
5. A main reason why firms tend to be less aggressive in multipoint competition is because if a firm retaliates in one market, retaliation may occur in all the markets in which the firms simultaneously compete. Basically, it is just smarter to play it safe sometimes rather than to risk the well being of many markets at one time.
6. One thing a firm must take into consideration when engaging in multipoint competition is whether or not to cooperate in all the markets in which it simultaneously participates with its competitor or to go against them. Firms must consider the short term gains as well as look at the long term gains. Many times cooperation is the safest action.
7. Many people would think that the state of the economy would have a huge influence on whether or not firms decide to cooperate with one another in the same market. However, studies have shown that the state of the market has little influence on whether firms decide to cooperate or not. This is still being widely debated though.
8. In certain cases, multimarket contact can increase the level of competition between firms. A firm’s strength in one market may hurt the other firms business in another market. This consequently leaves the other firm no choice but to compete or suffer huge losses.
9. In order for firms to engage in multimarket interactions, they must be aware of multimarket interdependency and have the motivation to do so. This means that firms must be aware of each other’s companies activities and then managers can make a decision from there to cooperate or not.
10. In certain organizations, cooperation is more likely to occur in multipoint competition. One such organization is hospitals. Most of the time hospitals cooperate with one another because this effectively is better for the hospitals as well as the people it serves each day.
The Video Lounge
This is a short video on why competition is important in all aspects of life including the business world.
Multipoint competition is becoming a widely talked about topic today simply due to the fact that firms are continually competing with each other in various markets more than ever. All of the major industries engage in multipoint competition and they all handle it differently. I believe that the smartest way to handle multipoint competition is to simply cooperate with rival firms. The long term gains outweigh the short term gains. Not cooperating is simply just too risky. Many firms these days have wisely adopted this approach. Others argue that competition is necessary to the growth and development of certain markets. I feel that there is room for both approaches in the business world and it all really just depends on the situation.
(6/28/2010). Multimarket contact. 9/29/10. https://en.wikipedia.org/wiki/Multimarket_contact
Jaime Gomez. (04/06/2006). Multimarket competition, foothold strategies and performance. 10/01/10. https://www.ivie.es/downloads/ws/bf/2006/04/06/ponencia01.pdf
John Stephan. (July-Aug 2003). Bringing managers into theories of multimarket competition. 10/2/10. https://orgsci.journal.informs.org/cgi/content/abstract/14/4/403
Contact Info: To contact the author of “Top Ten Management on Multipoint Competition: An Overview of Enterprises Competing in the Multiple Markets,” please email Seth Bourgeois at Seth.Bourgeois@selu.edu.
David C. Wyld (firstname.lastname@example.org) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at https://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (https://reverseauctionresearch.blogspot.com/), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:
- Management Concepts (https://toptenmanagement.blogspot.com/)
- Book Reviews (https://wyld-about-books.blogspot.com/) and
- Travel and International Foods (https://wyld-about-food.blogspot.com/).