Question

Please write at least 150 words on the following:

Under what condition the first-mover advantage could be a particularly important factor (consider the concepts such as Increasing return, Marginal cost, Network effect, Lock In effect, bulk processing industry, knowledge industry etc.)?

Answer 1

1) Increasing Returns to Scale (IRS) is when increase in the scale of production (number of units produced) brings down the average cost per unit.

The advantage of this is that it gives a significant cost advantage; while the first mover could have "built up" output in sync with rising exposure and demand for product over time, new firms have to come up with newer/better technology to deliver similar quality output at equal or lower price without the benefit of IRS (because nobody knows a startup when it first launches, and excess output would go to waste)

if the new firm can't match the existing firm's prices, it can't win - the first-mover has the upperhand in both cost and brand reputability.

2) (Positive) network effect is when the usefulness of an item increases the more people use it - smartphones, social networking utilities like Snapchat, WhatsApp, Instagram, Facebook, job seeking portals, Uber all benefited from it.

The network of people using eBay (for example) grows around eBay - so eBay can't be displaced easily, even if a "better" competitor comes along, simply because too many people are using eBay already for it to be ignored; as long as people expect other people to be using it, eBay will be on the Top 3 sites people think about when buying online.

3) Lock-In Effect is when one decision locks the agent into a sequence of decisions for the upcoming period of time e.g. subsidized smartphones with stipulated legal arrangement with AT&T.

Choice of Windows as the desktop environment for an office of 20 - and subsequent choice and purchase of expensive commercial software available only for Windows - would also count as a lock-in decision.

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IRS-driven monopolies have been displaced - better and cheaper technology comes along all the time.

Lock-In Effects are stronger but can be overcome by incentivizing the switch with additional perks e.g. "Switch to Verizon and exchange your phone for a new one, no questions asked"

Network effects are by far the strongest because they tap into a fundamental limitation of real world markets - coordination under imperfect information is difficult.
^ Even if you built a cost effective / "better" substitute for Uber (IRS disqualified) and were able to convince every person you came along to make the switch (Lock In Effect disqualified), how would you convince every person in Uber's gigantic userbase? More specifically, how would you reach out to them in the first place? (convincing comes later)

Thus upon scrutiny, only Network Effects stand up as a source for substantial first-mover advantage in terms of market leverage.