How Do Incumbents Respond to Bottom-of-the-Pyramid Firm Entry?

Scholars argue that serving markets at the bottom of the pyramid (BOP), composed of consumers with low purchasing power, has been offered as a strategic business opportunity. Beyond serving low-end consumers, do BOP firms affect market prices and the strategic choices of incumbent rms? We examine the impact of a BOP rm'spotential and actual entry on incumbent pricing behavior, particularly that of highend firms. We find that the threat of a BOP rm's entry as well as its actual entry lowers high-end prices and raises low-end prices in the market. We document similar changes in package sizes revealing a potential mechanism through which this impacton prices is manifested. A BOP rm's entry lowers the package size offered by highend firms, limits their ability to effectively price-discriminate, and leads to lower highend prices and an overall increase in the volume of sales. e anticipation of a BOP rm's entry increases low-end prices prior to actual entry, as low-end incumbentsadjust their package-size strategy. We relate these results to recent theoretical models of mixed markets featuring high-end and low-end rm entry and reflect on what makes the BOP strategy sustainable.

Project Team

Chirantan Chatterjee and Ajay Bhaskarabhatla

Sponsor

YFRC–IIMB

Select Project Type

Ongoing Projects

Project Status

Ongoing (Initiated in 2012-2016)

Funded Projects Functional Area

Strategy

How Do Incumbents Respond to Bottom-of-the-Pyramid Firm Entry?

Project Team:

Chirantan Chatterjee and Ajay Bhaskarabhatla

Sponsor:

YFRC–IIMB

Project Status:

Ongoing (Initiated in 2012-2016)

Area:

Strategy

Abstract:

Scholars argue that serving markets at the bottom of the pyramid (BOP), composed of consumers with low purchasing power, has been offered as a strategic business opportunity. Beyond serving low-end consumers, do BOP firms affect market prices and the strategic choices of incumbent rms? We examine the impact of a BOP rm'spotential and actual entry on incumbent pricing behavior, particularly that of highend firms. We find that the threat of a BOP rm's entry as well as its actual entry lowers high-end prices and raises low-end prices in the market. We document similar changes in package sizes revealing a potential mechanism through which this impacton prices is manifested. A BOP rm's entry lowers the package size offered by highend firms, limits their ability to effectively price-discriminate, and leads to lower highend prices and an overall increase in the volume of sales. e anticipation of a BOP rm's entry increases low-end prices prior to actual entry, as low-end incumbentsadjust their package-size strategy. We relate these results to recent theoretical models of mixed markets featuring high-end and low-end rm entry and reflect on what makes the BOP strategy sustainable.