Question

1. How does first-mover advantage lead into a sustainable competitive advantage?

2. Where does the Austrian Trade Cycle Theory fit into first-mover advantage?

3. How does efficiency impact collusion?

Answer 1

1. First mover advantage can be understood as the premium on the normal market returns that a firm exploits when it takes risk to enter into a new market, also refer Blue ocean strategy. The first mover advantages are:

• Technological advantage: As the firm who enters the market first with a new product, buys itself a time window in during which it enjoys a complete monopoly in the market segment in which the product was targeted at, during this time it has near to none competitors. The market shares soar in this period, but as technological developments are rapid, this window is small as competitors and substitutes enter in the market.
• Resources: As the first mover, the firm has complete control on the resources related to the product, the firm's suppliers also prioritize the firm's requirements, giving additional benefits like bulk discounts or extended credit periods.
• Market Share and Good will: First movers in the market are always seen as the consumer oriented firms which thrive to deliver best to their customer, this spreads a belief among the investors and customers in the market that leads to an increased goodwill in the market. At the same time the firm is able to explore into the new market territories which helps in increasing the market shares.

These factors lead to sustainable competitive advantage as:

• The firm patents the new technology and reduces the risk of competitors, also the firm has an opportunity to develop the existing product and further enjoy the market lead, the firm also may start licensing the technology and earn from the royalties. Eg. Samsung developed the OLED screens which are much better than the LCD screens, it is one of the biggest suppliers of OLED screens to giants like Apple.
• Increasing market share and goodwill in the market leads to new and bigger opportunities for the firm to grow and expand.
• The buyers and suppliers network is made which is very crucial, as the competitors will take time to make similar network.

2. Austrian Trade Cycle Theory (ATCT) suggests that the business cycles are the consequences of the excessive credit growth due to very low interest rates set by the central bank of a country. As the interest rates are low, businesses find a credit an attractive option for financing, especially in Capital, which happens to increase the case of malinvestments, as the businesses get "easy cheap money", easily available credit and at lower interest rates, this causes a volatility in the market, which is then corrected by a recession or credit crunch. The ATCT fits into the first mover advantage as the initially when the product is made available in the market, it enjoys the monopoly and promises great returns (introduction of low interest rates), but eventually more competitive firms tend to follow the same strategy (similar to more customers taking more credit) and then the market becomes a red ocean/saturated, with cut throat competition and low profit margins (recession).

3. Collusion often occurs in an oligopoly, where the rival firms cooperate for the mutual benefits, this effects the efficiency as;

The colluding firms are oligopolistic, and they run the market similar to a monoply and are less efficient. They produce less quantity and the price is higher than the marginal revenue and marginal cost, that helps them to maximize industry wide profits.