A first mover is dominating a market, with revenues of $40 million annually. The average total cost for the firm is $20 million, of which $19 million is fixed. How can the first mover keep others from entering the market?
Being the first producer in a market allows the firm to have advantages over potential new entrants to the market, but they can be significantly hurt if they do not protect themselves against competition.
Answer and Explanation: 1
The biggest problem with a first mover is that future competitors can observe what they have done or discovered and be able to enter the market and produce at significantly lower costs since they would only need to replicate what the first movers have done. This could cause the first mover to lose a chunk of their market share in addition to lowering their prices in order to remain competitive with the new entrants. A common example is when a pharmaceutical company develops a new drug. They will be the first to enter the market for that drug and will gain a large chunk of the market immediately because of a lack of competition. The problem, however, is that these drugs can cost up to hundreds of millions of dollars and another company can easily break down and copy the drug and sell for a much lower cost.
The best way for the first movers to fend off competition, at least in the short run, is by getting a patent or copyright for their product/methods. This will prevent other firms from copying their method since they will legally be prevented from doing so. This is why pharmaceutical firms are willing to put the hundreds of millions of dollars into developing a new drug. They know they will be able to get a patent for the drug and keep competition out of the market for years.
In the question, it is shown that 95% of the costs are fixed (19/20), indicating that this is an industry that has very high fixed costs, which may be be a barrier to entry to some other firms. Because of this high fixed costs, firms may be hesitant to enter the market if they feel the benefits do not outweigh the costs. While the first movers best way to hold off competition by way of a patent or copyright, they could also lower their prices in the short run in order to discourage competition. For example, they could reduce their price so that the overall revenue is $20 million. In this case, any new firms will be entering the market at a loss. This short-term strategy could help the first mover from needing to compete, but the strategy will not work in the long run unless they are able to keep profits at such a low level for an extended period of time.
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fromChapter 1 / Lesson 8
Have you ever heard the marketing term 'first mover' and wondered what it meant? Perhaps you are familiar with the term, but would like to learn more about the benefits and drawbacks to being a first mover. Let's take a closer look.