Daniel Scocco on Innovation Zen has an interesting article on First Mover Advantage.
Why is this interesting for the economics of technology?
First let us note that first mover advantage is not something that emerges from classical economic theory of competitive markets. In competitive market theory, new firms will enter the market and take market share until there are a large number of firms with roughly equal market share. First mover advantage is a result of market failure, due to product or production characteristics.
Daniel describes three main causes of first mover advantage in a market.
1. Industrial age environment – in an age of slow change, the first move has a time advantage.
2. Natural Monopolies – some markets can only support one supplier (motorways, electricity supply, …)
3. Bias towards winners.
I would add at least two more:
4. Economies of scale.
5. Network externalities.
Economies of scale exist in many new industries. If a firm faces decreasing average costs, then they can increase profits and decrease prices by increasing output. Once the first firm is established, others cannot enter the market unless they are able to at least match the scale of output of the incumbent firm.
Network externalities occur when a firms product generates derivatives or dependent products from other firms. The best-known example of this is the Windows operating system which established itself as a defacto “standard” on which many other products now depend.
