The first-mover advantage theory, as the name suggests, talks about the advantage of being a first-mover in the market. In past days, this theory has been discussed in mainly two categories: economic theories which try to explain the first first-mover advantage in terms of cost advantage over the competitors because of various factors, and behavioral theories which try to explain the responses of the customers to pioneering companies (Kerin, Varadarajan, and Peterson).
A company may get the first-mover advantage from factors such as scale and experience of the company, availability of information about the input as well as locations, and asymmetricity in marketing cost. While operating with monopoly power, a first-mover firm can promote its product and brand in an unobtrusive environment, and thus the impact of one successful ad campaign on the consumers can be long-lasting. A first entrant has greater information regarding the availability and price of inputs, the firms can decide upon the best location to establish factories and stores before the other companies enter the market. It can position itself according to the targeted segment and decide upon its marketing strategy (Kerin, Varadarajan, and Peterson).
According to International Business Studies, a company that is already operating in a market has a cost advantage as it’s experienced and has higher cumulative production than a newcomer. The new firms thus face a barrier to entry due to their high cost of production compared to the first-mover.
Fig: Learning Curve Effect
In the graph above, the horizontal axis shows the cumulative production which is the total production of the firm since it started producing. The production cost is negatively related to cumulative production. Suppose, firm A is the first-mover that has been producing for years, and hence its cumulative production (QA) is higher than that of the new entrant firm B (QB). Though the firm B has a better strategy to produce the same QA amount at lower cost (as the learning curve of firm B is below the same for firm A) firm A enjoys a cost advantage over firm B as the former’s cumulative production is high and thus cost of production is lower than the same of the later.
According to a video published in Films on demand (2011), a first-mover is more vulnerable to the risk factors in the market and if the firms can’t implement proper strategies they can lose. A study containing data from 365 business units producing consumer goods and 861 units producing industrial goods for 55 years (1930-1985) resulted that, indeed the first movers had some sales advantages but it had major cost disadvantages too. Other than this, the incumbent firms face a risk of their products or designs getting copied or innovated by the new firms. The main challenge for the first movers is to keep engaging their customers along with attracting new customers (Boulding, William, and Christen). To reduce such risks the first movers invest in research and development. They take time to do market surveys and understand how new products or brands can be introduced. Some companies try to be secretive regarding their technology as much as possible. Thus from the above discussion, it can be said that the first movers have advantages but they should know how to sustain themselves in the long run.
“First-Mover Advantage: The Mind of a Leader 2.” Films On Demand, Films Media Group, 2011, fod.infobase.com/PortalPlaylists.aspx?wID=19259&xtid=48946. Accessed 9 Mar. 2022
Boulding, William, and Markus Christen. "First-Mover Disadvantage". Harvard Business Review, 2001, https://hbr.org/2001/10/first-mover-disadvantage.
Chen, John S., Michael J. Leiblein, and Hart E. Posen. "UNCERTAINTY IN LEARNING CURVES: IMPLICATIONS FOR EARLY MOVER ADVANTAGE." (2019). https://www.researchgate.net/profile/Hart-Posen/publication/338779112_Uncertainty_in_Learning_Curves_Implications_for_Early_Mover_ Advantage/links/5e2a31b192851c3aadd5150f/Uncertainty-in-Learning-Curves-Implications-for-Early-Mover-Advantage.pdf
International Business Studies. International Business Studies. 2014, https://youtu.be/L5HlR07nt8g. Accessed 17 Feb 2022
Kerin, Roger A., P. Rajan Varadarajan, and Robert A. Peterson. "First-mover advantage: A synthesis, conceptual framework, and research propositions." Journal of Marketing 56.4 (1992): 33-52. https://seekscholar.com/sites/default/files/first%20mover%20adv.pdf