‘An Eye for an Eye’ or ‘Live and Let Live’: Reciprocal Competition, Mutual Forbearance and Organizational Learning in the Hospital Industry of Korea

Abstract

This study examines how competition between organizations is coordinated and where such coordinated market order comes from. Specifically, drawing on the mutual forbearance hypothesis and social exchange perspective, the study analyzes the effect of multimarket contact on the rates of market entry and exit in the hospital industry of Korea from 1980 to 2008. Results support the notion that multimarket competitors are likely to coordinate their competitive activities and mutually forbear from competing with one another. For example, a hospital tends to be reluctant to enter the market in which its multimarket competitors are present, because such aggressive entry might provoke the rivals’ retaliatory responses not only in that market, but also in other multiple markets they jointly contest. In addition, this study aims to refine the mutual forbearance theory by putting another focus on where such golden rule of mutual forbearance comes from. In line with organizational learning theory, we argue that organizational memories or prior experiences accumulated over the organization’s history provide an incentive to abide by the golden rule. This argument is supported by empirical analyses, which show that retaliatory responses to aggression and compensatory responses to cooperation are widely practiced in the industry and that organizational tenure in the industry increases the probability of living by the coordinated system of mutual forbearance. These results imply that market order can be constructed and sustained by organizational learning.