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First Mover Advantage - Essay Example

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This paper "First Mover Advantage" focuses on the fact that First mover advantage can be best explained as a form of competitive advantage that a company attains by being the foremost organization to announce its entry and thereafter, penetrate a specific market or industry. …
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First Mover Advantage
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Download file to see previous pages A perfect example of first movers includes companies such as, Coca-cola and eBay, who were the first companies to enter their respective market. Where Coca-cola was the first company to produce cola and made their products available to the public in 1886, eBay was the first company to introduce the auction process online in 1995. Both these companies have been a recurrent powerhouse in their respective industries ever since they were founded. It has been witnessed very often that first movers are generally pursued by competitors who try to capitalize on the original company’s success, brand value, and recognition. They try and acquire a market that has already been penetrated by the first moving company (Poulsen, 2007). The competitors try and bring about certain modifications and improvements in their product line and make them available to the public in order to market their products, as being better than the products offered by the first moving company. However, by the time the competitors lay their foundation in the already penetrated market, the first mover has already accumulated huge market share, customer loyalty, satisfaction, and expertise in this particular field of work, which is required to stay at the pinnacle (Markides and Sosa, 2013). However, a contrary idea has been provided by Markides and Geroski (2005) who had said that first movers of a new market are not the ones that dominate the market. The first and foremost requirement for a first mover is to be able to predict the reaction of the second mover to a choice made by the first mover. This, in turn, sets forth the necessity for the first mover to understand and assess the characteristics of the second mover. 
One of the crucial characteristics as far predicting the second mover’s reaction is concerned, is the second mover’s payoff function. First mover advantage is associated with pioneering products that benefit from advantages attained from a long-term market share. In addition to that, they also enjoy advantages in the distribution of those products, the improved product-line, breadth, and quality (Chen and Pereira, 1999). First mover advantages are characterized by a pioneering firm’s ability to earn positive economic profits (profits in excess of the cost of capital). First mover advantages transpire endogenously within the multi-stage process (Lieberman and Montgomery, 2002). The multi-stage process is depicted in figure 1. The first stage involves the generation of an asymmetry that enables a particular company to gain a competitive advantage over the rival companies. This opportunity to make the first move is a result of the firm’s possession of some unique information sources or foresight or may be simply out of luck. Once this asymmetry is established, a firm may be able to exploit its advantageous position by following a variety of mechanisms. These mechanisms thereby enhance the durability and magnitude of the first mover profits. Figure 1: Endogenous generation of first mover advantages (Source: Lieberman and Montgomery, 2002) Game theory is the process of modelling the strategic interaction between two or more players in a situation containing set rules and outcomes (Heap and Varoufakis, 2004). While used in a number of disciplines, game theory is most notably used as a tool within the study of economics. The economic application of game theory can be a valuable tool to aid the fundamental analysis of industries, sectors, and any strategic interaction between two or more firms.  ...Download file to see next pagesRead More
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