Welcome to Ph.D. Voices, a monthly series in which Ph.D. candidates share their research with the antitrust world. This month’s voice is Selçukhan Ünekbas, Ph.D. candidate at the European University Institute.
Gaze upon antitrust enforcement and regulatory efforts directed toward digital platforms, and you will likely notice a list of justifications in favor of a more interventionist approach. The justifications refer to various characteristics of digital markets, which typically include extreme returns to scale, scope economies, network effects, consumer lock-in and inertia, data-driven feedback loops, high switching costs, a lack of multi-homing, strategic entry deterrence by incumbents, and more. The effects of some of these concepts have been studied relatively widely. Others seem undeserving of the attention they garnered. The purpose of this short essay is to expose one such concept: first-mover advantage (“FMA”). Specifically, in three parts, I will argue that in digital markets, FMA rarely exists. When it does, it is usually temporary, and when it is lasting, it is often deserved.
The existential question
Before inquiring whether first-mover advantages exist, we must provide a definition. FMA is the perception that a firm is better off than its competitors due to entering first into a product/service market. It is akin to starting a 100-meter sprint five seconds earlier than one’s opponents.
The academic argument loosely constructed upon this definition is as follows. Large firms built impregnable market positions because they were the first to establish themselves, had more time to scale up, invest, build moats, erect artificial entry barriers, and consequently perpetuate their monopolistic grip. The usual suspects associated with competitive harm in the digital economy correspond to what is collectively known as “GAFAM” (or “FAANG” or simply “the Big Tech”). It follows that an argument relying on first-mover advantages to explain high levels of durable concentration in the digital economy would readily apply to these firms.
However, when put into a historical perspective, this argument fails outright. On the contrary, no Big Tech firm was the first to establish itself in its core market. Before Google, there was AltaVista, Ask.com, and Yahoo. Amazon entered into e-commerce with eBay already up and running. Facebook famously had to overcome Myspace, about whose market dominance journalists sometimes expressed fears of impregnability. Regarding operating systems, Apple had to defeat strong players such as Nokia and Blackberry, whereas Microsoft stood against the giant IBM. Outside of Big Tech, the ridesharing first-mover Sidecar was surpassed by Uber and Lyft, who got the pricing structure right. In short, no Big Tech firm was a first mover. Their success proves, if anything, the non-existence of first-mover advantages, or at least that the concept is overblown in fast-paced and highly dynamic industries.
Still, we need not limit our analysis to historical anecdotes. The foundations of the premise of first-mover advantages are also wobbly from a theoretical perspective. To demonstrate this, it is first necessary to examine the question of “moving first into what?”. The essential ingredient of FMA is the assumption that certain markets exist, a priori, waiting to be occupied. In this understanding, there is no need for entrepreneurship. Conversely, markets, consumers, or demand does not automatically exist – they are created by entrepreneurial activity. To paraphrase Israel Kirzner, it is the perception, the awareness boasted by the entrepreneur, that brings to life new opportunities in the form of novel products and services. Consequently, in novel markets, which comprise vast arrays of the digital economy, it would be impossible not to be a first mover. This perspective diminishes the aura of specialty attached to the concept.
Secondly, endorsing FMA may actually present matters backward. If anything, a first-mover disadvantage exists in digital markets. This is due to three reasons. First, FMAs would only materialize (if at all) if firms pass the survival stage. Survivorship bias invites caution vis-à-vis attributing the success of large firms to the early initiative. Until firms develop beyond their nascent stages, uncertainty related to consumer demand, product-market fit, and regulatory responses generates significant disadvantages. Second, once (a small number of) firms manage to defeat that uncertainty, what “works” for a particular segment of consumers becomes revealed, which in turn invites flocks of imitators. Coupled with the third argument, which cites evidence that digital firms already capture very little of the value they create anyway, there simply exist many challenges a first mover will need to overcome to establish a strong position in a novel market. These arguments call into question the concept of FMAs in industries marked by rapid innovation. In fact, well-known Silicon Valley figures support a notion of “last-mover advantage” instead.
The longevity question
Notwithstanding the foregoing, in some narrow circumstances, incumbents may possess certain advantages over entrants. However, it is another thing to exercise those advantages over a sustained period. Essentially, proponents converge around three claims to make a case for first-mover advantages: moats, lock-in, and funding. Below, I address each argument in turn.
The first argument for lasting first-mover advantages relates to the contention that first-movers build moats (or “walled gardens”) around their businesses. After securing their initial position, these firms act freely from restraints of competition, deter entry, and occupy impregnable market positions. While true in some cases, the argument rests on the assumption that rivals will have to defeat incumbents in their core markets. Defeating powerful firms in their home territory is admittedly a mammoth task. It is also unnecessary. Appealing to history once again, it is easy to see that Microsoft did not beat IBM in mainframes; Apple entered the mobile market with a completely new product; Facebook offered a much more streamlined network against Myspace; and Google invented blue links. These anecdotes support the notion that competition in the digital space occurs differently. For instance, platforms can enter into each other’s peripheral markets via envelopment leverage existing power to enter adjacent markets, or otherwise engage in “moligopolistic competition”. As one analyst put it, rivals need not penetrate an incumbent’s moat, only go around it.
The second argument relies on the notion of consumer lock-in. By being the first in a market, firms lock down a significant portion of consumer demand: consumers who cannot get out due to inertia. This argument is a corollary of network effects literature and has some merit. It is also incomplete for at least three reasons. For starters, not all network effects are created equal, and much depends on the value proposition of a given product. For some, network effects indeed grow exponentially, whereas, for others, the trend is more linear or even decreasing. Furthermore, network effects are not insurmountable. VHS video formats displaced Beta video formatting (owned by Sony), CDs replaced vinyl MPs, and Microsoft Windows surpassed DOS. Furthermore, network effects can work backward. This is especially true in today’s economy where consumer tastes and preferences change at an amazing pace. We can see a live demonstration of both arguments in a recent phenomenon: Meta’s fall from grace against TikTok. Facebook is increasingly incapable of catering to the preferences of Gen Z and continues to lose ground to TikTok, which can very well lead to a death spiral for the network. Consumers’ dictation of what to design (and how) not only haunts Facebook but even Google. Recent news abounds regarding the preference of Gen Z consumers to use TikTok for online searches. Google is taking the development so seriously that it plans to introduce its own visual search functions. In light of the foregoing, can we really say that first-movers steadily enjoy the quiet life of a monopolist due to arriving earlier to the party?
The third and last argument for non-transitory first-mover advantages relates to funding. The claim invoked is that first-movers deprive rivals of capital markets or venture funding, gaining additional early entry advantages. Well-functioning capital markets and healthy funding opportunities are indeed paramount to a firm’s success. However, acquiring such funding is not a complete recipe for survival. Take the example of PicBiz. It was the first photo app to secure significant investment from Silicon Valley capitalists, including the renowned A16Z fund, which turned Instagram down in favor of PicBiz. Nevertheless, PicBiz was displaced by Instagram, which paved the way for the latter’s acquisition by Facebook. Whereas funding may indeed be important, its early acquisition is by no means a guaranteed path to enduring advantages in dynamic markets.
In exceptional circumstances, firms may aggregate substantial advantages by creating a market and then occupying it early. However, the initial existence of some positive effects by early entries should not be taken as heralding their perpetuity, especially in destructive markets.
The “so what?” question
So far, our inquiry has focused on the existence and permanence (or lack thereof) of first-mover advantages. We have engaged in a descriptive study, which necessitates a prescriptive follow-up.
I argued that first-mover advantages rarely exist and that when they do, they are usually temporary. This leaves a slim category of scenarios where genuine advantages stemming from early establishment occur in a lasting fashion. However, the analysis should not stop here by readily condemning these instances as anti-competitive or societally harmful. It is important to go further and ask whether FMA, when it persists, is necessarily bad. Specifically, when confronted with lasting advantages emanating from an early venture into a market, it is important to ask one of the economists’ favorite questions: so what?
As discussed, commentators often attack first-mover advantages out of a conviction that simply being the first in a particular market deserves no regulatory sympathy. In a similar vein, an opposing view can also be constructed. In those rare instances where first-mover advantages materialize persistently, there are sound reasons to accord them value.
Discovering, capitalizing on, and surviving in a market is difficult. There are studies available that document why most platforms indeed fail to move past conception. Creating a market capable of generating consumer demand requires a great team, an outstanding product offer capable of withstanding quality competition, entrepreneurial characteristics, and uncertainty-bearing attributes – and failures are common. In these circumstances, first-mover advantages (if any) can just as appropriately be viewed as positive outcomes of an intrinsically unpredictable competitive process. To paraphrase Arthur, it is perhaps beneficial to give credit to those first able to devise a principle out of a phenomenon: that is, articulating and successfully commercializing a method by which naturally occurring phenomena can be exploited for human benefit. To paraphrase Kirzner, in a well-functioning capitalist economy, those able to perceive an economic opportunity and to successfully thwart the myriad challenges (i.e., the finders) of market survival may deserve the following advantages (“the finders-keepers rule”). Could Learned Hand’s famous quote from the infamous Alcoa opinion be a premonition of this argument?1The famous line reads as follows: “…[t]he (Sherman) Act does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins.” (United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945)).
An ambivalent approach to FMA would have several reflections on antitrust law and policy. In the EU, powerful firms may infringe the law if they abuse their strong market position. These potential infringements cannot be decoupled from their economic and factual context. Recognizing that first-mover advantages rarely materialize or last for a long time may contribute to an analysis of abuse of dominance. Furthermore, courts and agencies can take the dynamic nature of new markets into account before intervening or deciding on remedies. Acknowledging the transitory and creativity-rewarding nature of first-mover advantages in high-technology markets would not mark a break with the law. It would only serve to (re)ground antitrust intervention on informed economic foundations.
Of course, there may be valid arguments against the finders-keepers rule in digital economies. For example, what happens when a platform appropriates the quasi-rents in the form of entrepreneurial visions first developed by its trading partners? Can we even talk about first-mover advantages (in favor of the trading partner, who is the first entrant) in such scenarios? Is it really sufficient to possess the inventive capacity and entrepreneurial awareness – what about instances where the visionary entrepreneur has little access to capital, maybe due to discriminatory or short-sighted practices by creditors?
Whereas these questions present interesting avenues for further research, they largely surpass the scope of this short piece. Still, the main point remains: in dynamic industries, first-mover advantages rarely materialize. When they occasionally do, they are usually temporary, and when they last for a long time, it may be beneficial to inquire whether they are always something to be approached with regulatory enmity.