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When and how should an incumbent respond to a potentially disruptive event?

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  • Chevalier-Roignant, Benoît

Abstract

Incumbents can respond to the competitive threat posed by a startup either by external or organic growth. Incumbents may fail do so in due course due to a phenomenon known as “incumbent inertia.” I develop a dynamic model of investment that stresses a new rationale for such inertia. The incumbent may wait even though the option to delay one response is “deep in the money.” This is because the incumbent has to make a choice among several possible responses and is strategically ambivalent about which is best. Such inertia would be bad news for startup valuations if the incumbent delays a lucrative exit for venture capitalists, but good news for consumers if it sustains fiercer competition.

Suggested Citation

  • Chevalier-Roignant, Benoît, 2024. "When and how should an incumbent respond to a potentially disruptive event?," Journal of Economic Dynamics and Control, Elsevier, vol. 168(C).
    • Handle: RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001660
    DOI: 10.1016/j.jedc.2024.104974
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