First-Mover Advantage (Business)

First-mover advantage is the edge a firm can gain by being the first to enter a new market or to launch a new kind of product or service. Being early can let a firm learn faster, lock up scarce resources, build a brand and make it costly for customers to switch to later rivals. The idea was set out in an influential 1988 article by Marvin Lieberman and David Montgomery in the Strategic Management Journal, which grouped the sources of advantage into technological leadership, pre-emption of assets, and buyer switching costs.

Being first is no guarantee of success. Late entrants, often called fast followers or second movers, can learn from the pioneer's mistakes and enter once demand is proven. In game theory, a related idea is the advantage of moving first in a sequential game, known as Stackelberg leadership after Heinrich von Stackelberg (1934). First-mover advantage is strongest in markets shaped by network effects, where it can feed winner-takes-all outcomes.

Picture the first coffee shop to open in a new office district. It gets the best corner, the office workers form the habit of going there, and its loyalty cards keep them coming back. A rival who arrives a year later has to fight for a worse spot and lure people out of their routine.

But the late arrival has advantages too. It has watched which drinks and pastries sold, what prices people accepted and which opening hours were wasted. It can copy what worked and skip the mistakes. Whether the first shop's head start outweighs the second shop's lessons depends on the market.

• Learning and patents. Early producers move down the learning curve, cutting costs as they gain experience, and may protect inventions with intellectual property rights.
• Pre-emption of scarce assets. The first firm can secure the best locations, suppliers, distribution deals, radio spectrum or regulatory licences.
• Switching costs. Customers who have learned a system, stored their data in it or signed contracts may not want to move.
• Network effects. When a product becomes more useful as more people use it, an early lead can grow on its own.
• Scale and reputation. An early leader can reach economies of scale first and become the name customers associate with the whole category.

In the Stackelberg model of duopoly, one firm commits to its output first and the follower then responds. Suppose market demand is $P = 100 - Q$, where $P$ is the price and $Q$ is total output, and each firm has a constant marginal cost of 10. If the two firms chose at the same time (the Cournot case), each would produce 30 units, the price would be 40 and each would earn a profit of $(40 - 10) \times 30 = 900$. If one firm moves first, the leader's best choice is 45 units and the follower responds with 22.5. Total output is 67.5, the price is 32.5, the leader earns $(32.5 - 10) \times 45 = 1{,}012.5$ and the follower earns $(32.5 - 10) \times 22.5 = 506.25$. Committing first lets the leader claim a larger share of the market, though only because its commitment is credible. The same logic applies more loosely in real oligopolies.

Pioneers bear the cost of educating customers, building infrastructure and testing technology, and later entrants can benefit from that work for free. Early products are often built on technology that is soon overtaken. In a 1993 study, Peter Golder and Gerard Tellis found that many firms remembered as market pioneers had in fact failed, and that later entrants frequently led. Familiar examples include web search, where Google was a late entrant; social networking, where Friendster and Myspace came before Facebook; and smartphones, where the iPhone (2007) followed earlier devices. Creative destruction means a first mover's lead can be overturned when technology shifts.

Diners Club, launched in 1950, is usually described as the first general-purpose charge card, but the bank-backed networks that became Visa and Mastercard came to dominate card payments. In Kenya, M-Pesa, launched in 2007, kept its lead in mobile money partly because its agent network and user base made the service more useful than later rivals. In regulated finance, early holders of licences such as money services business registrations or approvals through a regulatory sandbox may gain time before competitors arrive, though licences rarely protect a firm for long. Competition authorities watch for early leaders that use their position to block entry, a concern in antitrust cases against platform companies.

• Lieberman and Montgomery, "First-Mover Advantages", Strategic Management Journal (1988)