How do incumbents respond to bottom-of-the-pyramid firm entry?

Abstract

Serving markets at the bottom of the pyramid (BOP), composed of consumers with low purchasing power, has been offered as a strategic business opportunity, although considerable disagreement exists about the size of the low-end market and the sustainability of the BOP strategy. Beyond serving low-end consumers, do BOP firms affect market prices and the strategic choices of incumbent firms? We examine the impact of a BOP firm?s potential and actual entry on incumbent pricing behavior, particularly that of high-end firms. We find that the threat of a BOP firm?s entry, as well as its actual, entry lowers high-end prices and raises low-end prices in the market. We document similar changes in package sizes revealing a potential mechanism. A BOP firm?s entry lowers the package size offered by high-end firms, limits their ability to effectively price-discriminate, and leads to lower high-end prices and an overall increase in the volume of sales. The anticipation of a BOP firm?s entry increases low-end prices prior to actual entry, as low-end incumbents adjust their package-size strategy. We relate these results to recent theoretical models of mixed markets featuring high-end and low-end firm entry and reflect on what makes the BOP strategy sustainable.