This literature review demonstrates that our understanding of MF has improved over the years. We know that multi-market rivals forbear from rivalry, that the relationship between multi-market contact and level of rivalry is curvilinear, that MF takes place primarily in the key markets of rivals and is a property of the relationship between a dyad of rivals, and that multi- market contacts are established for reasons unrelated to the motive to forbear from rivalry.
Though our understanding of MF has increased significantly as a result of research, this literature review shows that there are three crucial gaps in our understanding. First, we do not
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know what motivates multi-market rivals to begin to mutually forbear. The theoretical arguments put forth in extant literature assume that MF is a deliberate strategy and that multi-market rivals are motivated to forbear from the beginning, despite the empirical evidence to the contrary. Hence we need to explain what motivates multi-market rivals to forbear from competition by leveraging their contacts across markets. More specifically, we need to provide a theoretical explanation for the unintentional formation of MF and the causes of the switch that transforms competition into cooperation.
Second, cooperation and its impact on MF are not studied in the extant literature even though cooperation was originally proposed as one of two mechanisms that trigger MF across markets. The literature review shows that firms’ natural response to aggression and defection is cooperation. Hence we need to develop a better understanding of the role of cooperation in the development of MF especially since MF, in essence, is a strategy of cooperation. We have not yet identified the strategic effects of multi-market competition when rivalry involves cooperation (Kang et al., 2010).
Third, because the majority of the studies examine only the sign and functional form of the relationship between multi-market contact and mutual forbearance, we do not know how firms coordinate their actions to move to the MF equilibrium (Busse, 2000) rather than to competing equilibriums, such as limited war, all out war, or maintenance of the status quo. More specifically, we do not know how firms use contacts across markets to learn how to cooperate (Scott, 1991) and signal their intent to mutually forbear (Busse, 2000). In addition, we do not know how signals from multi-market firms to establish cooperation fail and the impact of such failures on the genesis of MF. Thus, we need theories that explain the process by which multi- market rivals move to the MF equilibrium.
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In the next chapter, I develop a model that addresses each of these gaps in our understanding. The model as a whole seeks to bring cooperation back into our understanding of the development of MF. As noted above, investigation into the role of cooperation has been overshadowed by a focus on deterrence, even though theoretically both deterrence and cooperation are required for the development of MF. Therefore, the first research question to be addressed in this dissertation is: What is the role of cooperation in the development of MF?
I use theories of trust and learning as guiding perspectives in the development of the model. Trust, as a construct, is relevant to MF theory because it is associated with both cooperation and deterrence and it confirms to the prospective orientation of MF theory. I argue that trust is particularly relevant in the context of multi-market competition because the processes associated with multi-market competition are consistent with the formation of inter- organizational trust. Besides, the core of MF strategy requires firms to make themselves vulnerable to retaliation across markets (Greve, 2000). Such willingness to be vulnerable is the definition of trust for scholars that conceptualize trust as a social orientation towards others (Mayer et al., 1995; Malhotra, 2004; Rousseau et al., 1998). Thus, the second research question to be addressed in this dissertation is: Does trust enable a dyad of multi-market rivals move from rivalry to cooperation and, if so, how?
I take an organizational learning perspective to develop hypotheses about how cooperation evolves and how multi-market rivals coordinate their actions to move to mutual forbearance equilibrium rather than to competing equilibriums. Theories of organizational learning are relevant to MF theory because multi-market contact provides many opportunities to learn (Scott, 1991) and acts as information conduit that facilitates all types of learning (Wegberg and Witteloostuijn, 2001). “Facing the same other seller in different markets affords a learning
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opportunity that is not present when a different rival is faced in every market” (Feinberg and Sherman, 1988, p: 986). In addition, an organizational learning perspective complements and enriches the prospective orientation of MF with an historical perspective that also shapes firm conduct. Examining MF through the lens of organizational learning provides a more realistic and comprehensive approach to the study of MF because it acknowledges that both the past and the future influence the cooperative and competitive actions of firms. Thus, the third research question to be addressed in this dissertation is: Does learning theory explain the process by which a dyad of multi-market rivals moves to MF?
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CHAPTER 3
A THEORETICAL MODEL: ORIGINS OF MUTUAL FORBEARANCE
In this chapter, I develop a model of the evolution of mutual forbearance between a dyad of rivals across markets. The model is based on the theoretical foundations of mutual forbearance that were outlined in chapter two and it suggests that mutual forbearance across markets between a dyad of rivals is the result of a learning process. The development of inter-organizational trust, which results from extended multi-market rivalry between two firms, is proposed as the triggering mechanism that motivates the initiation of the learning process.
Prior to presenting the model, a discussion of the processes involved in rivalry and how they ultimately lay the groundwork for the formation of inter-organizational trust is required. Section one therefore links the mutual recognition of rivalry between two multi-market firms and the resulting competitive interaction to the development of multi-market competition, reduction in performance, and norms of competition. Section two relates multi-market competition, norms of competition, and poor performance to inter-organizational trust. Section three introduces the model and develops the hypotheses that are tested in this dissertation. The fourth and final section of this chapter summarizes the chapter.
3.1 Rivalry, Multi-market Competition, Poor Performance and Norms of