Microeconomic Life Lessons: The Second-Mover Advantage
My nephew (age 12) had an existential crisis the other day. He wants to be a musician or a writer but is stressed out because “all of the good ideas are already taken”. I decided to spare him four years of rigorous economics coursework and told him about the most important economics lesson I’ve learned – the second-mover advantage:
Second-mover advantage occurs when a firm who follows the lead of the first-mover is actually able to capture greater market share, despite having entered late.
First-mover firms often face high research and development costs and the marketing costs necessary to educate the public about a new type of product. A second-mover firm can learn from the experiences of the first mover firm and may not face such high research and development costs if they are able create their own similar product using existing technology. A second-mover firm also does not face the marketing task of having to educate the public about the new project because the first mover has already done so. As a result, the second-mover can use its resources to focus on making a superior product or out-marketing the first mover…the notion that winners are always the first to enter the market is a misconception. (Wikipedia entry)
Examples include Obama (vs. Hillary), Nintendo (vs. Atari), Oprah (vs. Donahue), and AMD (vs. Intel). Second-movers are able to capitalize on the work done by others and create innovative products at a lower cost. The “early bird may catch the worm” but later birds can dominate marketing and distribution.
Think different? No: Observe first. Think second.