The concept of first mover advantage is widely used in gametheoretical Essay

The concept of first mover advantage is widely used in gametheoretical models and international trade theories. Discuss it in th - Essay Example 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 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 the 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 th e 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). ... 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 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 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 competitive advantage over the rival companies. This opportunity to make the first move is a result of the firm’s possession of some unique infor mation 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 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 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