How does regulation impact strategic repositioning by firms across submarkets? Evidence from the Indian pharmaceutical industry

We study coercive institutional pressures as an impetus for firms to reposition across intraindustry boundaries. Integrating the literatures on strategic repositioning and submarkets, we predict that firms respond to regulations limiting the profitability of a submarket by repositioning and shifting demand to proximate, unregulated submarkets within the industry. We expect repositioning to be more pronounced for firms with greater ability to shift demand across submarkets. Evidence from pharmaceutical firms’ responses to partial price regulation in India supports our hypotheses. Repositioning firms increase prices and sales in the unregulated submarket, consistent with a Dorfman–Steiner-type model of endogenous and costly demand shifting toward the unregulated submarket. We contribute to the literature on strategic repositioning and highlight challenges of regulating industries with internal boundaries and insulated niches.