First-mover disadvantages with idiosyncratic consumer tastes along unobservable characteristics

Abstract

Upon entering a market, a first-mover often preempts the best market location and outperforms followers in competition. Conversely, late entrants are in better positions to learn more about demand by adopting a “wait-and-see” strategy and then enjoy superior performance. This paper demonstrates first-mover disadvantage, even in the absence of follower's informational advantage, by using a standard spatial competition framework. Specifically, a first-mover gains a substantial advantage over followers when firms correctly predict individual consumer choices with their market locations. However, the first-mover obtains lower sales and profit when consumers exhibit large idiosyncratic tastes along unobservable characteristics.