First-Mover Advantage

• Unobserved Heterogeneity


  First movers have advantages of high performance because the choice to be a first-mover is endogeneous to high-performane; e.g., they have dynamic capabilities
• Lieberman and Montgomery (1988)

  1. Economies of Scale
  2. Experience
  3. Costs of switching
  4. Brand reputation and credibility
  5. Diffusion of the product
• Lieberman and Montgomery (1988); First-Mover Advantage

  FMA occurs when environments change, and this is coupled with proficiency, luck, or both

  3 Sources:

  1. Technological Leadership: Learning curve, lower costs, success in patent races
  2. Pre-Emption of Assets: Controlling valuable assets and resources through acquisition
  3. Buyer Switching Costs
• The Learning Curve: Boston Consulting Group


  Unit production costs fall with cumulative output
• Lieberman and Montgomery (1988); First-Mover Advantage

  Disadvantages:

  1. Free-rider
  2. Technological uncertainty
  3. Incumbent inertia (safety?)
  4. Entrants can learn from mistakes of incumbent

  “Early bird gets the worm, but the second mouse gets the cheese”
• Lanzolla (2015); The Half-Truth of First-Mover Advantage

  • FMA is never a certainty
  • The likelihood of its occurrence is affected by the turbulence of markets and the pace of technological change
  • In calm waters, with gradual evolution of technology, moving first will likely payoff
• Epple (1990); Learning Curves in Manufacturing

  Large increases in productivity as organisations gain experience in production.

  Factors affecting learning in organisations:

  1. Formulating manufacturing strategy
  2. Production scheduling
  3. Training
  4. Pricing and Marketing
  5. Predicting competitors’ costs
• Shapiro and Varian (1999); The Art of Standards Wars


  Strong network effects mean compatibility is king. First-movers should seek to establish a standard and protect the position, but also remain flexible as technology evolves, and offer customers a path towards this new technology

  Standards Wars: Battles for market dominance between incompatible technologies
• Pfeffer (2006); Hard Facts, profiting from evidence-based management

  First-Mover Advantage:

  • Existing empirical evidence is actually mixed and unclear as to whether such an advantage exists
  • Many of the success stories turn out to be falseAmazon, for example, was not the first company to sell books on the web