Research summary: We reconsider the relationship between multimarket contact and product quality in the airline industry by arguing that multimarket contact has both a negative mutual forbearance effect on quality and a positive network coordination effect on quality. Multimarket contact increases the frequency of contact between firms, and this anticipated future interaction promotes cooperation. In network industries, especially small firms may want to cooperate in order to increase the attractiveness of the composite product. By using size as a moderating variable, we indeed find a consistent positive effect of multimarket contact on product quality for small airlines. We show that this effect can be attributed to network coordination and that this effect generally dominates the negative mutual forbearance effect in a recent period. Managerial summary: Firms with sales in multiple geographical markets likely encounter each other with mutual respect (i.e., live and let live) because aggressive behavior in one market may lead to retaliatory responses in other markets. Such responses weaken competitive pressures on price and quality. Insofar these firms sell complementary products, they may however also coordinate and improve their joint product offering, resulting in better quality for the consumer. This paper shows that this positive effect of cooperation may dominate the negative competition-reducing effect, depending on the size distribution of firms. The reason is that small or nondominant firms have a stronger incentive to produce compatible products than large or dominant firms with already a strong position in the (global) market.

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ERIM Top-Core Articles
Strategic Management Journal
Department of Applied Economics

van Reeven, P., & Pennings, E. (2016). On the relation between multimarket contact and service quality: Mutual forbearance or network coordination?. Strategic Management Journal, 37(10), 2121–2134. doi:10.1002/smj.2435