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As a special kind of interaction between firms, competition is the determinant of business strategy and represents contested goals (Galvin et al., 2020). The emergence of competition may be determined by some factors. In terms of the product market, one firm will face similar suppliers and customers with competitors, and the competitive environment faced by this firm is built by its products or services (Hoberg & Phillips, 2016). Some competitive relationships may come from other sources, such as labor, patents, and prices (Galvin et al., 2020). According to the resource-based view, unique and rare resources will encourage firms to design competitive actions and reactions, which may determine their survival. During this process, competition emphasizes limiting imitation from competitors, and the close relationship between firms and their competitors will be built by utilizing the same or similar resources (Barney, 1986). The reactions of a firm to its competitors are directly influenced by the decision-making and performance of competitors, which may produce imitation among such firms (Porter, 1989). The core of exploring competition is to explain how firms engage in some competitive actions and reactions, which are represented by the structure of the whole market (Andrevski et al., 2016).
The identification of competitors is a key step in exploring the competitive relationships between firms. In Porter’s (1989) theory, the factors related to competition mainly come from the product market where firms compete for customers or suppliers, and these factors will determine the future development goals of such firms. Consistent with this view, the process of identifying competitors depends on the identification of the product market; that is, firms in the same product market are engaged in competition for economic surplus, produced by their goods or services (Salop, 1979). Many studies have used industry classification to determine the boundary of the product market and identify the competitors of one firm by industry tags (Chen et al., 2017; Hrazdil et al., 2014; Katselas et al., 2019). The common industry classification systems include the Guidance for Industry Classification of Listed Companies released by the China Securities Regulatory Commission (CSRC), the Standard Industrial Classification (SIC), and the Global Industry Classification Standard (GICS). The decision-making of a firm is regarded as its reactions to the actions of competitors in the same industry, which explain some behaviors of this firm, such as capital structure (Phillips & Mackay, 2005), earnings management (Kedia et al., 2015), information disclosure (Lin et al., 2018), and corporate social responsibility (Cao et al., 2019). From the nature of industry classification, the measure of competition is mainly based on industry boundaries.