First movers are companies which were the first to enter a completely new market, therefore offering their customers innovative products and creating new demands for novelty. They can also be companies who were the first to develop a non-existing market in a specific geographical area, which allows them to satisfy the existing demands for customers. These companies are argued to have an advantage over potential new rivals due to their originality in creating a new demand or making an effective decision to open in an area which lacks a certain product. There are three mechanisms which one is essential for a company to gain first mover advantage. For example, technological leadership in production process is as vital as pre-emption of assets and development of buyer switching costs . However, what is definite is that regardless of what market they are in, companies would agree that there is no certainty for success. Despite having the position to exploit position, due to existing asymmetric knowledge with potential competitors, many first movers have experienced failure as a result, either from successful hit and run firms, or simply due to launching a product that did not attract enough consumers. Being an advantageous first mover is when the firm is capable of maintaining dominance for product in the market, thus sustaining its competitive advantage and at the same time, is making abnormal profits in the long run. A first mover can many times have the position of a monopoly which can lead to benefits of controlling the market and strengthening brand loyalty.

A company can gain first mover advantage by being the first to break through the research and development in-order to produce innovative products through technological leadership. With patents laws or even trade secrets, this vital production process can be protected from becoming known to any other companies or entrepreneurs. Having technological advance which is difficult for others to imitate, either in producing or organizing things, can also be argued to be another benefit of a first mover company. As the ‘beneficial’ knowledge they have is vital, significant importance must be given in protecting it. Not only does it keep the business unique but it is what composes the personal business proposition, therefore making the company able to sustain its easily threatened competitive advantage from potential competitors. Evidently, it can be justified that it is perhaps more difficult to sustain future innovations and maintain competitive advantage than to enter a new market. This is because technological leadership provides transient first mover advantage, and so it is essential for the company to devote sufficient resources to maintain its success.

Moreover, first movers enjoy the benefit of having experience, a better understanding about the market and the production process, which can act as a barrier to new entrants. According to the economist William Baumol, lack of perfect knowledge is considered to be one of the invisible factors which indicate that the market is not contestable. It will be difficult, especially when the incumbent firm is a first mover company, for a follower to acquire the appropriate know-how for the production of the product. Being on the ‘learning curve’ is weakening for potential entrants, yet strengthens barrier for the first mover. In addition, pre-emption and investment in plant and equipment can be another advantage for the first-movers. A first mover company, if successful to keep secret their methods of production, can obtain a large share of the market which allows it to have the position of a monopoly. Dominating a market means that the company is of a sufficient size, thus, it also has the benefits from lower average costs; economies of scale. Exploiting its position and being advantageous from different economies of scale, has as a result the possibility for the company to lower its prices as the costs of production are reduced. It is not affordable for a new entrant as this results in them having higher average costs compared to the incumbent firm, which directly makes it less competitive. This furthermore leads to greater benefit for the first mover company, as it is able to attract more customers, and many times, due to there being no other choice for consumers, it can gain a strong brand loyalty advantage. Brand loyalty existing in the market from a firm, immediately makes the market more difficult to enter as it acts as a barrier to entry. However, due to a large number of customers being loyal to the product of the first mover company, it makes high sunk costs for a potential new entrant. Entering the market knowing that certain start-up costs cannot be retained if they fail to reach success makes the market definitely incontestable as new entrants are not willing to risk a large amount of money. Therefore, with a first mover company obtaining brand loyalty, advertising and marketing costs which will have to be used by an entrant to destroy this relation the incumbent firm has with customers, are entirely sunk. Fundamentally, with a first mover company having such strong barriers to entry due to its large dominance, it is extremely difficult for new entrants to enter and succeed. The non contestability of the market allows the first mover company to be protected from newcomers, thus capturing greater market share and increasing it’s dominate position in the market. Earning large abnormal profits in the long run, leads to further investment and even better profits in the future.

Finally, the first mover advantage can arise from buyers switching costs. This makes it costly for late comers to attract consumers away from the first movers which can be seen through different types of switching costs. According to (Schmalensee 1982), where buyers choice under uncertainty, the buyers may rationally stick with the first brand they encounter that performs the job satisfactorily1 leading to the establishment of successful brand loyalty, such as Coca-Cola soft drinks and Kleenex facial wipes, occupying a unique position in consumers mind and dominating the market for a long time. Consequently, it will be more difficult for followers to win new customers. A further switching cost is a consequence of supplier specific learning, where once they become familiar and adapt to a certain product including its characteristics and functions, such as Nokia’s ‘standard’ function of the mobile phone, it becomes costly to switch to different products (Wernerfelt 1985)1. Building in contractual switching costs that are created by the seller, described in Klemperer (1986)1 is important to consumers who are willing to pay more now if that means that this will benefit them in the future, an example seen with airline frequent-flyer miles.
However, being a first mover is not always as advantageous as many believe. There have been companies which have experienced failure, despite all the benefits they first had over potential rivals. Sony experienced this, when its Betamax video recorder system was driven out of the market by Philips VHS. Losing control of the dominance is often caused by the lack of ability to keep production knowledge safe from others. A new entrant having sufficient knowledge on how to produce the ‘unique’ product, or where to get supplies of raw materials from (if the first mover was in a geographical area which lacked that product), is a factor which makes the market more contestable. With the market losing its barriers to entry, and with the ‘free-rider effects, resolution of technological or market uncertainty, shifts in technology or customer needs, and incumbent inertia’1, it becomes beneficial for late comers. ‘Late movers may be able to ‘free-ride’ on pioneering firm’s investments in a number of areas including R&D, buyer education, and infrastructure development’1. These new “imitation costs” which could be generating profit for the firm are much lower than the “innovation costs” for the first mover.

In addition, if the first mover company has low sunk costs, it is likely to be threatened by ‘hit-and-run’ firms. These are firms which are aware of their inability to compete with the incumbent firm in the long run, but at the same time know that if they can enter the market with the benefit of earning abnormal profits by undercutting the established firm and then closing it relatively cheaply when they are pushed out of the market from the dominant firm. With the constant threat of these ‘hit-and-run firms’, a first mover company may be forced to take decisions as if in a competitive market, thus limiting their ability to exercise their market power. This fear of small firms entering the market and nibbling their market share can result in the incumbent firm from producing at profit maximization where marginal cost equals marginal revenue, shifting to the strategy of limit-pricing in order to push new entrant out of business. Undoubtedly, this leads to lower profits and thus less investment for a more efficient production process.

Another disadvantage that is combined with being the first mover, results from its dominant power. Having acquired a large market share, the company obtains the position of a monopoly. Despite the fact that monopolies have various advantages due to their power, they also have a negative effect in that government may intervene in the market to stop the company from abusing its position, by deliberately strengthening the barriers to entry so that new entrants are forced out of the business. An argument against a dominant company is that due to the lack of competition they have the ability to produce low quality goods and increase prices. Therefore, the government may choose to raise the level of contestability when dealing with exploitative dominant firms rather than punishing them directly. This can be done by the government giving subsidies to potential entrants; helping them achieve success, and through the use of supply side policies in order to increase competition and decrease market failure.
Nevertheless, it can be argued that there are different factors which can affect the disadvantages of each first mover, which lead to new entrants succeeding and sometimes to such an extent that the incumbent firm sees failure. If an industry experiences rapid changes in technology, new entrants may find it difficult to obtain an equivalent standard of capital equipment. On the other hand, in a market where there are no such technological advances, it is easier for a new entrant to buy old equipment and be complete. Likewise, it will be much easier to enter a market where there are no well-branded and marketed products, which lead to new entrants having to invest in expensive counter-marketing of their own, thus having a significant sunk cost. Also, a market with high levels of non-recoupable and non-reloadable infrastructure expenditure, can limit the determination of a new entrant. Additionally, the change in customers’ needs and wants can also be the result of a first mover company failing to reach success. What must also be taken into account is that how easy it is for the follower to gain customers from them switching to different products depends on the elasticity of demand for the product. The more inelastic PED consumers have, the easier they will switch to a competitor’s product if price is lower.

Therefore it can be seen, that a first mover company can benefit not only from having technological leadership, asymmetric knowledge with potential new entrants of the market, economies of scales but also from obtaining the position and power of a monopoly if it manages to acquire a significant market share. With building up a strong image for its product, brand loyalty and thus sunk costs can act as powerful barriers to entry in the market. However, whilst there a numerous advantages of being a first mover, it is clear that there are strong disadvantages. Losing the secrecy of the production method, thus allowing knowledge to leak out to potential entrants can be very destructive to the company, and has many times led to failure as a result. Also, government intervention can help followers succeed with help of training programs or grants for opening the business in a certain area.

Bibliography
1. Chandler, A.D. (1990), ‘The Enduring Logic of Industrial Success’, Harvard Business Review, 58, 130-140.
2. Lieberman, M. and D. Montgomery (1988), ‘First Mover Advantages’, Strategic Management Journal 9, 41-58.
3. Anderton, A., Economics A Level, 5th Edition, (2008), Edexel