The Pennsylvania State University The Graduate School Marketing Department ESSAYS ON COMPETITION AND USER-GENERATED CONTENT A Dissertation in Business Administration by Gaurav Sabnis 2011 Gaurav Sabnis Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy August 2011 ii The dissertation of Gaurav Sabnis was reviewed and approved* by the following: Rajdeep Grewal Irving & Irene Bard Professor of Marketing Dissertation Advisor Chair of Committee Gary L. Lilien Distinguished Research Professor of Management Science John Liechty Professor of Marketing and Statistics Arvind Rangaswamy Senior Associate Dean for Research and Faculty Anchel Professor of Marketing Gary Bolton Schwartz Professor of Business Duncan Fong Professor of Marketing Chair of Marketing Department *Signatures are on file in the Graduate School iii ABSTRACT In recent years, research on the marketing impact of online user-generated content (such as blogs, twitter, forum postings etc.) has received attention from academics as well as practitioners. However, research on the role competition plays in the marketing impact of user-generated content has received relatively little attention. Specifically, there is no research on the dyadic impact of competitive user generated content (e.g., how do blog posts about firm A influence the performance of firm B and vice versa) Through this dissertation, I intend to contribute to the literature on the impact of user-generated content on firm performance by examining competitive interactions. In essay 1, I carry out a comprehensive review of the competition literature in marketing, management, economics, sociology, and other related fields to enable me to identify the concepts and models critical to examining competitive interactions. In essay 2, I test for the existence of competitive interactions in the impact of blog posts about cable news shows on their daily viewership. I find that competitive interactions do exist and whether the competitive impact of user-generated content is positive or negative varies across different time slots of cable news programming. In essay 2, I found evidence for competitive interaction, but did not have a continuous measure for competition. In essay 3, set in the airline industry, I develop a continuous measure for the competition variable (asymmetric multi-market competition) and test the moderating effect of this competition variable on the impact of competitors’ negative user-generated content on stock returns. I find evidence for the existence of competitive interactions yet again, and find the direction as well as magnitude of these interactive effects to vary depending on the level of competition. Specifically, I find that airline firms benefit from negative online user-generated content iv about competitors at symmetric but moderate and asymmetric but advantageous levels of multi-market competition. v TABLE OF CONTENTS LIST OF FIGURES ................................................................................................................. vii LIST OF TABLES ................................................................................................................... viii ACKNOWLEDGEMENTS ..................................................................................................... ix Chapter 1 Competition and its Implications for Marketing Strategy ....................................... 1 ABSTRACT ..................................................................................................................... 1 Introduction ...................................................................................................................... 2 Market structure and competition .................................................................................... 4 Demand-based perspective of competition .............................................................. 5 Supply-based perspective of competition ................................................................. 8 Environment-based perspective of competition ....................................................... 10 Integrating the three perspectives ............................................................................. 13 Agenda for further research on competitive market structures ................................ 14 Competitive interactions .................................................................................................. 15 Behavioral approach to competitive reactions (interfirm rivalry) ............................ 16 Structural Approach to Competitive Reactions (NEIO Model) ............................... 20 Agenda for Further Research on Competitive Interactions ...................................... 23 Chapter 2 Cable News Wars and the Internet: Modeling Competitive Interactions for Primetime Viewership and User-Generated Content ....................................................... 29 ABSTRACT ..................................................................................................................... 29 1. Introduction .................................................................................................................. 29 2. Data .............................................................................................................................. 33 2.1. Data Context ...................................................................................................... 33 2.2. Data Description ................................................................................................ 35 3. Modeling Television Viewership and User-Generated Content .................................. 42 3.1. Modeling Issues Specific to Television Viewership ......................................... 43 3.2. Modeling Issues Specific to User-Generated Content ....................................... 44 4. Model Development ..................................................................................................... 45 4.1. Within-Show Endogeneity ................................................................................ 48 4.2. Competitive Cross-Effects ................................................................................ 49 4.3. State Dependence: Daily Continuity ................................................................. 50 4.4. State Dependence: Lead-in Effects ................................................................... 51 4.5. Unobserved Heterogeneity ................................................................................ 52 5. Model Estimation ........................................................................................................ 53 6. Results .......................................................................................................................... 55 6.1. Within-Show Endogeneity and State Dependence Effects ............................... 55 vi 6.2. Competitive Cross-Effects ................................................................................ 58 6.3. Predictive Validity ............................................................................................. 62 7. Discussion .................................................................................................................... 64 Chapter 3 The Impact of Asymmetric Multi-Market Competition on Competitive Interactions of User-Generated Content ........................................................................... 68 ABSTRACT ..................................................................................................................... 68 1. Introduction .................................................................................................................. 69 2. Conceptual Development ............................................................................................. 71 2.1. Impact of UGC on Competition’s Financial Performance ................................ 71 2.2. Role of Asymmetric Multi-Market Competition in Competitive Interactions .. 76 3. Data .............................................................................................................................. 78 3.1. Data Context ...................................................................................................... 78 3.2. Data description................................................................................................. 79 4. Model ........................................................................................................................... 83 4.1. Model Motivation .............................................................................................. 83 4.2. Model Development .......................................................................................... 85 4.3. Model Estimation .............................................................................................. 87 5. Results .......................................................................................................................... 87 5.1. Spatial lag results .............................................................................................. 87 5.2. Impact of Airline’s own NUGC on its Stock Returns ....................................... 88 5.3. Competitive Interactions in NUGC’s Impact on Stock Returns ....................... 88 5.4. Impact of Asymmetric Multi-Market Competition on Competitive Interaction Effects of UGC on Stock Returns .................................................. 91 5.5. Robustness Checks