Week 4_Chellappa et al. (2010)_Jung Kwan Kim

The research of Chellappa, Sambamurthy, and Saraf (2010) is motivated by conflicting arguments in strategy literature to respond the question: is it beneficial to participate in a crowded market or not? By examining the enterprise systems software (ESS) industry, the authors argue that the detrimental effect of being in a crowded market can be counteracted by the virtuous effect of demand externality.

More specifically, the authors suggest that “the performance of an ESS firm is positively related to its degree of multimarket contact with the other ESS firms” (Hypothesis 1). This is mainly because ESS firms in a market may enjoy the mutual forbearance to secure higher market performance if they are more familiar with and more fearful to each other based on the possibility of retaliation. The Hypothesis 2 is also supported, though weakly, saying that “the performance of an ESS firm is positively related to its degree of participation in crowded markets, or the extent of market domain overlap.” The customers perceive the presence of many ESS firms in a market as a positive signal about the importance and the legitimacy of the component in the market. Also, the crowded market attracts more knowledge brokers (such as consultants), reinforcing the legitimacy and the viability. Thus, the participation in a crowded market may bring a positive performance, though the outcome can be somewhat mitigated by the intensity of competition. Finally, the Hypothesis 3 contends that “the positive effects of ESS firms’ participation in crowded markets are increased by the level of multimarket contact with other ESS firms.” This hypothesis is also supported in that an ESS firm in a crowded market with high multimarket contact understands rivals better and in that such ESS firm has more ways to retaliate any rivalrous activities of other similar firms.

In conclusion, ESS firms may benefit from competing in many crowded markets, a counterintuitive implication to traditional strategy scholars.