Competitive Response to Radical Product Innovations

Abstract

Radical product innovations are often agents of creative destruction. They threaten to destroy existing market positions, and yet they often yield vast new market opportunities. This article examines how competitors respond to the introduction of radical product innovations. The authors argue that competitive response to radical product innovations is inherently different from response to the incremental innovations that are typically studied in existing research. They introduce the dual concepts of market expansion and entry thresholds to develop new hypotheses about competitive response. Some of these hypotheses contradict prior literature. Using objective data from the U.S. pharmaceutical industry between 1997 and 2001, they estimate a shared-frailty hazard model to explain the competitive response to radical product innovations. The results show that the likelihood of competitive response is substantially higher when the introducing firm is large or market dependent. Moreover, the response is highest when the innovation is introduced in a small market by a large firm. These results contradict those from much prior research on competitive response to product innovation.