Tuesday, February 15, 2011
Class # 7: Key Take Aways
The reason is that failing to respond resulted in sufficient lost market share that retaliation was cost effective. In contrast, holding smaller excess capacity weakens the threat of a price cut and changes the strategic response of the rival. Now a price cut leads to smaller market share loss. The cost of retaliating in that circumstance is lower than the benefit. This type of "weakness" strategy is sometimes called the "puppy dog ploy."
Puppy dog ploys appear in a number of practical contexts. One notable context is for startup airlines. Imagine a cut rate carrier decides to add a route already served by an incumbent. (Kiwi Airlines did exactly this against Continental in Newark some years ago). If the startup is small, then the lost share is such that it's not worth fighting a price war. If, however, the rival's capacity grows (or threatens to grow), then a different and altogether more aggressive strategic response is provoked. Ultimately, it was the growth of Kiwi that doomed its business model.