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Optimal Entry Timing in Markets with Social Influence

Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
yjoshi{at}rhsmith.umd.edu
reibstein{at}wharton.upenn.edu
zjzhang{at}wharton.upenn.edu

Firms routinely face the challenging decision of whether to enter a new market where a firm's strong presence in an existing market has a positive influence (the leverage effect) on product adoption in the new market, but the reciprocal social influence on the existing market is negative (the backlash effect). In this paper, we show that a firm's optimal entry strategy in this situation cannot be characterized by the familiar "now or never" or "now or at maturity" strategies proposed in the literature. We show that a strong leverage effect does not necessarily provide the justification for a firm to enter a new market, and neither should a strong backlash effect necessarily deter a firm from embracing a new market. The optimal strategy is predicated on a judicious trade-off between the three factors of leverage, backlash, and patience. Thus, an astute manager can always find the opportune time to enter the new market if she takes into account the dynamic and recursive nature of cross-market interaction effects, where leverage enhances the backlash but backlash weakens the leverage in a nonlinear, dynamic fashion. We illustrate that firms stand to benefit from explicit considerations of these effects in deciding whether and when to enter a new market. Furthermore, we explore how the optimal time of entry into the new market relates to the time of peak sales for the existing market, demonstrating that depending on the interactive effects of leverage and backlash, entry could be optimal either before or after peak sales in the existing market.

Key Words: market entry; social influence; optimal timing; brand extension
History: Received: December 18, 2006; accepted: December 17, 2008.