Firstmover Advantage

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FIRST-MOVER ADVANTAGES
Marvin B. Lieberman David B. Montgomery’ October 1987 Research Paper No. 969

1The authors are, respectively, Assistant Professor of Business Policy, and Robert A. Magowan Professor of Marketing, at the Stanford Business School. We thank Piet Vanden Abeele, Rajiv Lal, Mark Satterthwaite and Birger Wernerfelt for helpfiul discussions on earlier drafts. The Strategic Management Program at Stanford Business School provided financial support.

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Abstract This article surveys the theoretical and empirical literature on mechanisms that confer advantages and disadvantages on first-mover firms. Major conceptual issues are addressed, and recommendations are given for future research. Managerial implications are also considered.

INTRODUCTION
What, exactly, are first-mover advantages? Under what conditions do they arise, and by what specific mechanisms? Do first-movers make aboveaverage profits? And when is it in a firm’s interest to pursue first-mover opportunities, as opposed to allowing rivals to make the pioneering investments? In this paper we examine these and other related questions. We categorize the mechanisms that confer advantages and disadvantages on first-mover firms, and critically assess the relevant theoretical and empirical literature. The recent burgeoning of theoretical work in industrial economics provides a rich set of models that help make our understanding of first-mover advantages more precise. There is also a growing body of empirical literature on order-of-entry effects. Our aim is to begin to provide a more detailed mapping of mechanisms and outcomes, to serve as a guide for future research. We define first-mover advantages in terms of the ability of pioneering firms to earn positive economic profits (i.e., profits in excess of the cost of capital). First-mover advantages arise endogenously within a multi-stage process, as illustrated in Figure 1. In the first stage, some asymmetry is generated, enabling one particular firm to gain a head start over rivals. This first-mover opportunity may occur because the firm posesses some unique resources or foresight, or simply because of luck. Once this asymmetry is generated there are a variety of mechanisms that may enable the firm to exploit its position; these mechanisms enhance the magnitude or durability (or both) of first-mover profits. Our discussion is organized as follows. We first consider theoretical models and empirical evidence on three general categories in which first-mover advantage can be attained: leadership in product and process technology, preemption of assets, and development of buyer switching costs. We then examine potential disadvantages of first-mover firms (or conversely, relative advantages enjoyed by late-mover rivals). These include free-rider problems and a tendency toward inertia or sluggish response by established incumbents. The next section addresses a series of basic conceptual issues. These include the endogenous nature of first-mover opportunities, and various definitional and measurement questions. We conclude with an assessment of opportunities for additional research, and a summary of managerial implications.

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MECHANISMS LEADING TO FIRST-MOVER ADVANTAGES
First-mover advantages arise from three primary sources: (1) technological leadership, (2) preemption of assets, and (3) buyer switching costs. Within each category there are a number of specific mechanisms.1 In this section we survey the existing theoretical and empirical literature on these three general categories of first-mover advantages. The theoretical models surveyed in this section assume the existence of some initial asymmetry among competitors that can be exploited by the first-mover firm. This intial asymmetry is critical; without it first-mover. advantages do not arise. Later in the paper we consider ways in which this asymmetry may come about.

Technological Leadership
First-movers can gain...
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