Perceiving Competitive Reactions: The Value of Accuracy (and Paranoia)

Perceiving Competitive Reactions: The Value of Accuracy (and Paranoia)

By David Bruce Montgomery, Bruce Clark
1995Working Paper No. 1335

An assumption of much of the literature in marketing strategy is that firm accurately knows the nature of its interaction with competitors. This study examines this assumption, and explores the relationship between firm performance and accuracy in perception. Teams in the Markstrat2 simulation game reported their reactions to competitors, while simultaneously indicating their perceptions of whether competitors had reacted to their decisions in the past. Teams were in general inaccurrate in identifying competitive reactions. Further, missing a competitive reaction (not perceiving a competitor's state reaction) significantly reduced a team's performance. The data suggest that teams may benefit from being paranoid about their competitors; late in the game, the more competitive reactions a team perceived to its moves, the better the firm performed, regardless of accuracy.