Competitive Strategy 425ever delivers a medium-quality item at a premium price, the buyer in question
refuses to pay a premium price to that seller ever again and instructs all other
buyers to treat the seller the same way. Given this purchasing behavior by buy-
ers, any seller has the incentive to deliver high-quality items and maintain its
reputation.
Finally, although reputation provides a basis for repeated cooperation in
the pricing and quality contexts, this need not always be the case. In other con-
texts, a firm’s advantage may lie in establishing a reputation for toughness. For
instance, in the market-entry game in Table 10.5, we saw that the key to success
was to preempt the market by being the first to enter. Now suppose there are
a multitude of markets across the country to enter and conquer. How can a
firm successfully expand and claim its fair share (or more than its fair share)
of these markets? The experience of Wal-Mart Stores Inc. provides a classic
example. While other national discount store chains were declaring bank-
ruptcy, Wal-Mart aggressively expanded into small southwestern cities—locali-
ties that would support one discount store but not two.
What has been the chain’s experience in cities where it has met competi-
tion from other retailers? It has relied mainly on its reputation for “staying the
course.” Thus, Wal-Mart has been willing to suffer losses while waiting for its
competitor to exit the market. By maintaining a tough reputation, this “pre-
empt and persist” strategy is credible in each new market Wal-Mart enters.
Finally, what has been Wal-Mart’s response to new entrants in markets where it
already holds a monopoly position? In many cities, the economics are essen-
tially as described in Figure 10.2a’s game tree. It is more profitable to main-
tain price after entry than to cut price. In isolation, Wal-Mart’s threat to cut
price is not credible and would not deter new entry. But the very fact that Wal-
Mart is a chain of stores—some 4,000 U.S. stores facing an endless number of
would-be entrants—profoundly alters its incentives. Wal-Mart credibly can
pledge that it will fight entry by alwayscutting prices afterward. According to
this pledge, if it once acquiesces to entry, it forever sacrifices its reputation for
toughness and will acquiesce to future entrants that challenge its other stores.
By staking its reputation in this way, Wal-Mart succeeds in deterring entry in
equilibrium; the short-term profit gain from accommodating entry (even once)
is not worth the permanent cost (in reduced future profits) from destroying its
reputation for toughness.A FINAL NOTE ON FINITE COMPETITION We have seen that unlimited rep-
etition can support cooperation in equilibrium. Of course, competition need
not go on indefinitely. For instance, one might imagine that there is some prob-
ability that the competition will end after any stage. As long as this probability
is small enough, the previous analysis, in support of the cooperative equilib-
rium, continues to hold. However, what happens when the number of periods
of competition are limited rather than infinite, that is, when the final period
(even one very far in the future) is known? Here the logic of cooperationc10GameTheoryandCompetitiveStrategy.qxd 9/29/11 1:33 PM Page 425