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Uncertainty, Flexibility, and Market Entry

Authors/Editors: Claussen, J.
Essling, C.
Published: 2014
Type: Articles in Refereed Journals (International)
Published by: SSRN

Abstract

We study the relationship between demand variation and entry and how this relationship is moderated by firm-specific flexibility. Demand variation, represented by amplitude, frequency and unpredictability of demand change, has been shown to affect entry decisions of firms. We hypothesize that demand variation reduces entry but that a firm's ability to cope with this uncertainty moderates this relationship. Using entry into routes in the airline industry as the empirical setting, the results indicate that, while amplitude and change frequency have a negative effect, the relationship between unpredictability and the likelihood of entry is inverted U-shaped. We also find that airlines hedge their risky entry decision, i.e., they are more likely to enter if their individual flexibility is large relative to the unpredictability of the market.

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