New Product Entry: the Moderating Role of Compromise Effect on Pioneering Advantage
ABSTRACT:
Consumer research has mainly focused on the static nature of the compromise effect without considering how time varying factors may influence decision rules and the composition of choice set. New products entry and the position occupied by new brands modify the context of choice and consequently can change preferences.
This article examines the extend to which order of entry affects the robustness of compromise effect. Our results demonstrate that a pioneer brand could be negatively or positively affected by the arrival of a new alternative when this turns it into an extreme or a compromise alternative.
Extended Abstract:
The reader will be familiar with the rich literature within marketing, economics, and strategy regarding order of entry effects. The general proposition emanating from research in economics is that first movers will have lasting advantages (Bain 1956; Bond and Lean 1977; Schmalensee 1982). This has been confirmed in a number of marketing studies (Robinson and Fornell 1985; Urban et al. 1986; Robinson 1988b), and the mechanisms whereby pioneer advantage is derived have been explored. However, results are not unequivocable (Moore, Boulding, and Goodstein 1991). In particular, it has been argued that first movers tend to have higher returns but their order of entry is also related to higher risk of failure (Kalyanaram and Urban 1992). Indeed, research on first mover advantages has been shown to be subject to a number of limitations and potential biases (Kerin, Varadarajan, and Peterson 1992).
An important stream of literature on pioneering advantage is interested in explaining pioneering advantage from a behavioral perspective. In particular Carpenter and Nakamoto (1989) and Kardes and Kalyanaram (1992) have explored the cognitive mechanism underlying this phenomenon, indicating that a consistent portion of pioneering advantage can be ascribed to cognitive mechanisms. In particular, Carpenter and Nakamoto (1989) suggest that pioneering advantage is the outcome of the consumers’ learning process as well as preference formation. More recently, literature in marketing and consumer behavior has questioned the robustness of order of entry effect consequently the existence of the follower advantage has been explored.
The entry of new brands determines the rise of not only an order, but also a context effect. A new brand might dominate or being dominated by the first and the second brands, therefore being an extreme option, or become an intermediate option. Interestingly, extant literature has shown that brands can gain share when they become intermediate options in the choice set. This phenomenon has been widely researched and it is known as compromise effect (Chernev 2004; Dhar and Simonson 2003; Novemsky and et al. 2004; Nowlis and Simonson 2000; Sheng, Parker, and Nakamoto 2005; Simonson 1989).
While investigating compromise effect, consumer research literature tends to focus on its static nature without considering how time varying factors may influence decision rules and the composition of choice set. Several factors might affect the composition of choice set and those factors could be the outcome of diffusion effect or the result of firms’ conduct. For instance, the increasing availability of information over time and the arrival of a new brand in a market might affect the consumers’ preference formation process and might determine a modification of the context within which choices are made.
Our work intends to marry these two streams of literature by examining the impact of context effects (i.e. compromise effect) on order effects (i.e. pioneering advantage). In particular we are interested in understanding how the position that the pioneer occupies into the choice set, after the arrival of followers, can change the intensity of its alleged advantage.
It should be noticed that, while studying compromise effect in a dynamic context one should take into consideration the evolution of consumers’ preferences and the increase in their knowledge about product categories. In particular, familiarity with a product category could also influence the impact of compromise on order of entry effects. This study also aims to understand whether highly familiar consumers tend to ascribe lesser value to pioneering status when a brand acquires an extreme or compromise position in a choice set as a consequence of a follower arrival.
In our empirical investigation, we use a within-subject design whereby subjects undertook a two part task. Participants in the experiment were 165 students at a major European University and the experiment is a 2 (set size: two vs. three product alternatives) Χ 3 (information on the pioneer: extreme alternative as the pioneer vs. compromise alternative as pioneer vs. no information on the order of market entry) factorial design. Participants were randomly assigned to one of the experimental conditions. With a time lag of five days participants were asked twice to carry out the same task.
The sample was divided in three groups to control for factors external to the experiment. Group 1 examined the case in which the extreme alternative A was the pioneer, while Group 2 examined the case in which the middle alternative B was the pioneer: both groups were told that alternative C was the third entrant into the market. Group 3 served as control group with participants being given no entry order information.
Our results show the presence of compromise effect in the absence of information about order of entry and different pattern of choice in presence of such information.
The compromise effect was not significant when the first brand entering the market was the middle option B because that option was the most chosen already at time t1: the pioneer could hold its advantage if the followers chose a position that identifies the pioneer as the middle option. When the first brand turned out to be an extreme option (A) after the arrival of followers, the composition of the new choice set would favor the rise of compromise effect: the presence of the information on the pioneering status of option A would increase the share of option A but would not vanish the compromise effect.
Additionally, we observed a significant difference between the strength of the compromise effect when brand B was the pioneer and when no pioneer information was provided (respectively, t-test = 4.42 and t-test = 3.30). On the contrary, in both the product categories examined, there we did not find a significant difference between the case in which A was the pioneer and when no additional information was provided. More importantly, we show that the magnitude of compromise effect changed in magnitude when A or B were the pioneer.
Finally, by dividing respondents by their degree of product category familiarity, we could identify two groups: low familiar consumers and high familiar consumers. The analysis of choices for both high and low levels of familiarity shows interesting results. More specifically, familiarity affects the relationship between order and compromise effects. In particular, for high levels of familiarity our results do not differ from those obtained while considering the entire sample; By contrast, for low levels of familiarity, the pioneer brand holds the preferences even when the arrival of followers creates condition for the rise of compromise effect. This suggests that low familiarity acts upon consumers preferences uncertainty and serves as driver for the use of the easier and more explicit cue, which in our case is related to the pioneering status. When familiarity increases, the more available cue (i.e. order of entry) does not serve as principal preference driver, and the pioneer advantage is overcome by the composition of choice set.
New Product Entry: the Moderating Role of Compromise Effect on Pioneering Advantage
INTRODUCTION
The compromise effect, which predicts that brands can gain share when they become intermediate options within the choice set, is one of the strongest and most important effects documented in behavioral decision research, systematically affecting choice under different conditions (Chernev 2004; Dhar and Simonson 2003; Novemsky and et al. 2004; Nowlis and Simonson 2000; Sheng, Parker, and Nakamoto 2005; Simonson 1989). Most research on choice focuses on the decision rules by which consumers select an option from amongst a set of alternatives, as if both choices and alternatives were completely independent of any other choice. This implies that choices are analyzed as ‘one shot’, time-invariant events. Obviously this approach disregards several factors, such as correlation among choices (i.e., sequence of non independent decisions); the dynamic nature of information availability and time-dependent relationships between alternatives within choice sets.
Relationships between alternatives may or may not be driven by firms’ actions. For instance, the actual order in which products enter the marketplace is the result of firms’ conduct, whereas customers’ increasing knowledge of this market entry order, and their familiarity with product categories are the outcome of diffusion effects. Both conditions, however, might affect the consumers’ preference formation process. Interestingly the arrival of a new brand in a market also determines a modification of the context within which choices are made. In particular, a pioneer brand could be negatively or positively affected if the arrival of a new alternative turns it into either an extreme or a compromise alternative (Lehman and Pan 1994). Moreover, when product familiarity acts on uncertainty and preference constructions, it can moderate the interaction between the order of entry and the compromise effect in affecting purchasers’ decisions.
Our work examines the interaction between these two effects as well as the moderating role played by product category familiarity. Our findings contribute to extant research in various ways: i) by identifying conditions that might enhance or attenuate pioneering advantage; ii) by showing whether and how the compromise effect is modified by time varying conditions; iii) by analyzing the effect of product category familiarity on the use of information and heuristics.
1. Relevant Literature
The present study focuses on the evolution of context effects, and in particular the compromise effect, hypothesizing an array of choices repeated in a time period during which the consumer is exposed to the arrival of new brands onto the market.
More specifically, the object of this research is to examine the interaction between preferences related to the pioneer option and those related to the compromise option. We aim to understand how repeated exposure to choice sets that might favor the emergence of compromise effect interact with information about the order of entry of alternatives into the choice set, distinguishing the cases in which the pioneer brand occupies the extreme position in the choice set from that where it represents the ‘middle’ (i.e. ‘compromise’) position.
1.1 Compromise effect and Pioneering advantage
Among context effects, the compromise effect has recently received increasing attention (Chernev 2004; Dhar and Simonson 2003; Dhar, Menon, and Maach 2004; Kivetz, Netzer, and Srinivasan 2004; Novemsky et al. 2004; Parker and Nakamoto 2005; Sheng et al. 2005). Empirically observed by Simonson (1989), this effect denotes the phenomenon by which a brand’s market share is enhanced when it occupies an intermediate position in the choice set. In particular, the compromise effect occurs if the choice share of option B, relative to option A, is enhanced when a third option C is added to the choice set, making B the ‘compromise’ option (see Figure1).
FIGURE 1: COMPROMISE EFFECT
Prior research into context effects (Benartzi and Thaler 2002; Chernev 2004; Dhar, Nowlis, and Sherman 2000; Drolet 2002; Huber, Payne, and Puto 1982; Nowlis and Simonson 2000; Simonson 1989) has attempted primarily to document the existence of these phenomena as ‘one-shot’ choice events. Although more recently attention has focused on subsequent choices (Amir and Levav 2006; Drolet 2002), limited effort has been made to investigate whether and how the compromise effect is influenced by external time-varying conditions.
Our main hypothesis is that the interaction between the compromise effect and pioneer advantage is moderated by the nature of the pioneer alternative. In particular, we contend that information about the pioneer can drive preferences, allowing it to gain share when information is available as compared to when it is not.
The reader will be familiar with the rich marketing, economics and strategy literature regarding order of entry effects. The general, the proposition emanating from research in economics is that first movers will have lasting advantages (Bain 1956; Bond and Lean 1977; Schmalensee 1982). This has been confirmed in a number of marketing studies (Robinson and Fornell 1985; Urban et al. 1986; Robinson 1988b), and the mechanisms whereby pioneer advantage is derived have been explored. However, results are not altogether unequivocal (Moore, Boulding, and Goodstein 1991). In particular, it has been argued that while first movers tend to have higher returns, they also run higher risks of failure (Kalyanaram and Urban 1992). Indeed, research on first mover advantages has been shown to be subject to a number of limitations and potential biases (Kerin, Varadarajan, and Peterson 1992).
An important stream of literature on the pioneer advantage is interested in explaining order of entry from a behavioral perspective. In particular Carpenter and Nakamoto (1989) and Kardes and Kalyanaram (1992) have explored this phenomenon, indicating that a consistent part of pioneer advantage can be ascribed to cognitive mechanisms. In particular, Carpenter and Nakamoto (1989) suggest that pioneer advantage is the outcome of consumers’ learning and preference formation processes.
More recently, marketing and consumer behavior literature has questioned the robustness of the order of entry effect, and has consequently explored the existence of a follower advantage. On one hand, it is widely recognized that first movers tend to become the category standard for consumers, and later entrants risk being be evaluated merely as imitations of the pioneer (Carpenter and Nakamoto 1988). On the other hand, later entrants have been shown to enjoy, on average, advantages both in cost terms (Boulding and Christen 2001) and in terms of the stage of their products’ life cycles (Shankar, Carpenter, and Krishnamurthi 1999).
Heuristics such as compromise effects are often used to facilitate the choice process: Dhar and Simonson (2003) have shown that options are sometimes selected, not because they are preferred, but because they allow customers to resolve difficult purchasing decisions by choosing the alternative in the ‘middle’ of a market as a compromise choice (Simonson 1989). Our main proposition is that consumer preference for pioneer brands can also simplify their choice process, in this case towards the product that entered the market first. This will depend, of course, on information about market entry order being available, and where it is, it will tend to undermine the conditions which sustain the compromise effect. In such cases, the pioneer effect may weaken, or even cancel out, the compromise effect.