This study examines the relationship between the erosion of first-mover advantages and the competitive behavior of pioneer and follower firms in a service industry—in this case, the European mobile telecommunications industry. The research analyzes the role of market actions related to innovation, pricing and promotion, and non-market actions related to judicial issues. The study finds that first movers enjoy a sustainable market share advantage in this service industry, but that this advantage depends on the type of actions taken by pioneers and followers. Specifically, followers that take more market actions than the pioneer are not able to erode the first-mover's advantage. However, followers taking more non-market actions – such as litigation and complaints – are successful at taking market share from the pioneer.
Strategies are dynamic and firms must take actions both to build and protect their competitive advantages as well as erode their competitors' advantages. In many industries this results in interdependence: performance does not depend solely on individual actions but also on those of competitors. Firms, then, need to be alert to their competitors' moves and ready to respond.
The relationship between pioneers and followers clearly shows the interdependent nature of firms' actions. Follower firms need to develop competitive behavior that will enable them to erode pioneer advantage, while pioneers must fight to consolidate their position. Pioneer advantages are sustainable in many different manufacturing industries (Robinson, 1988, Kalyanaram and Urban, 1992 and Urban et al., 1986). In service industries, though, holding onto pioneer advantages is hard (Kerin et al., 1992 and Sundbo, 1997) as innovations are difficult to protect with intellectual property rights and competitive actions are easy to identify and imitate (Preissl, 2000 and Hipp and Grupp, 2005). Information goods are an example of the incomplete protection that intellectual property rights provide. Indeed, digital technology has exacerbated this problem by making it possible to transmit information perfectly and instantaneously (Shapiro and Varian, 1999). Likewise, innovation is difficult in the financial industry because products are easy to copy and enhance (López and Roberts, 2002 and Makadok, 1998).
Empirical research on pioneer advantages in service industries is still at an early stage. The few studies published find first-mover advantages in the financial sector (Tufano, 1989, López and Roberts, 2002 and Berger and Dick, 2007) and in the mobile telecommunications industry (Bijwaard et al., 2004 and Fernández and Usero, 2007), while surveys by Djellal and Gallouj (2001) and Song et al. (1999) indicate that although pioneer advantages exist in service industries, they are not easily sustainable.
The sustainability of pioneer advantage is likely to be contingent on the type of product (Srinivasan et al., 2004) and the type of actions taken by incumbents (Ferrier et al., 1999). Firms can compete by employing different types of actions related to factors like product, pricing and advertising (Smith et al., 1992). But firms can also act in the public policy arena via non-market actions such as regulation, litigation, and lobbying (Baron, 1993). The use of non-market actions, particularly litigation, to obtain competitive advantages has become “a necessity, not an option, in business” (Shell, 2004, p. 19). This may be especially true when the business models and technologies are easy to replicate or when government is in control of many of the business opportunities, which reduces the effectiveness of other types of actions (De Figueiredo and Spiller, 2000). In a service industry where actions are easy for competitors to identify and copy, then, non-market actions should be highly effective.
De Castro and Chrisman (1995) have explored competitive strategies of pioneers and followers, while only – as far as we know – Ferrier et al. (1999) and Ferrier (2001) have studied the relationship between competitive behavior and the erosion of leaders' market. This paper continues this research. It has two objectives: First, to study the sustainability of pioneer advantage in a service sector like the mobile telecommunications industry. Second, to analyze what types of competitive actions are most effective at eroding pioneer advantage. In addition to product innovations and pricing, the paper will focus on the effectiveness of non-market actions.
The empirical study examines the European mobile telecommunications industry between 1997 and 2000. The characteristics of the sample make it possible to avoid two of the critical drawbacks of previous studies: the use of samples composed exclusively of US firms and the possible endogeny of market entry (Lieberman and Montgomery, 1998). First, most research has focused on US firms without considering whether the results could be generalizable to other countries. Our sample contains firms from countries in the European Union. Second, because firms were only able to enter the market when governments granted them licenses, the problem of endogeny disappears. The study also includes market and non-market actions, which – with the exception of Shaffer, Quasney, and Grimm (2000) – is not a standard practice in empirical research. Although prior research examines non-market actions, research on litigation is thin on the ground, as is work on the effects of non-market actions on firm performance (Hillman et al., 2004). This study analyzes both aspects.
The paper is set out as follows. The next sections establish the theoretical framework and hypotheses that the study will test and present the empirical analysis. The paper concludes with a discussion of the results and a summary of the study's implications, limitations and directions for future research.
Sustaining
fi
rst-mover advantages is dif
fi
cult in many industries as
follower
fi
rms can easily counter competitive actions with similar
actions. This dif
fi
culty is usually assumed to be greater in service
industries because copying rivals' innovations and price reductions is
a simple matter.
The
fi
ndings of this paper, however, do not con
fi
rm this assump-
tion. Using data from the European mobile telecommunications
industry, we do not
fi
nd that market actions are able to signi
fi
cantly
erode pioneer advantage. Even when follower
fi
rms are more
innovative than pioneers are in relative terms, they are unable to
signi
fi
cantly erode pioneer advantage. Similarly, greater relative
activity reducing prices and running promotions are no more effective
at taking market share from pioneers. First-mover advantages,
therefore, endure in an industry where the ease of identifying and
copying actions cast doubt on their sustainability.
The ineffectiveness of followers' market actions may be due to
higher than anticipated switching costs and network effects. In any
case, research on the effects of reducing switchingcosts inthe mobile
telecommunications industry is inconclusive.
Fernández and Usero
(2007)
fi
nd a positive relationship between portability and the
erosion of pioneer market share.
Shi et al. (2006)
, however, show
how number portability increases bigger
fi
rms' market share, as
more consumers subscribe to the larger network to enjoy the greater
on-net price discounts. Other factors apart from portability, such as
loyalty and the play-safe mentality that limits the movement of
clients among competitors, are also likely to be at work (
Grajek,
2007
). Loyalty can lock in clients, preventing them from switching
fi
rms despite the availability of attractive alternatives. In fact, brand
image and reputation are the best ways of defending pioneer
advantage in a service industry (
Djellal and Gallouj, 2001
). Of course,
follower
fi
rms may be able to win market share from other followers.
While their competitive market actions may do nothing to erode
pioneer advantage, then, they could impact the market share of a
rival follower.
Reputation management is one of the objectives of non-market
actions (
Baron, 1993
). This paper provides support for previous
fi
ndings that indicate they are another way of attacking competitors
(
Yao, 1997
). Indeed, our empirical research shows that non-market
actions
–
lawsuits and complaints
–
are the only actions that
signi
fi
cantly erode pioneer market shareThe effectiveness of litigation may lie in its capacity to attack the
sources of a
fi
rm's reputation.
Basdeo et al. (2006)
show that
competitive actions affect a
fi
rm's own reputation and that of its
competitors. These actions provide information on
fi
rm behavior and
can reveal how some
fi
rms engage in practices that are detrimental to
the client and competition in general. Litigation is also distracting to
managers, who have less time to spend on business issues when
dealing with lawsuits, which impacts negatively on the
fi
rm's
competitiveness and results in the loss of market share.
Non-marketactionsalsoseemtobemoredif
fi
culttorespondtothan
market actions. Copying a legal action involves launching another legal
action. To do this,
fi
rms must have previously detected a hypothetical
regulatory breach. This is probably what makes them more unexpected
and dif
fi
cult to copy in relative terms than competitive actions such as
product innovations, price reductions and promotions.
Paradoxically, none of the actions that theoretically should have
some effect on market share is effective, while legal actions with no
direct in
fl
uence on sales are capable of signi
fi
cantly eroding pioneer
market share. Litigation is more common in regulated industries
–
such as mobile telecommunications
–
because more opportunities for
it exist (
Shell, 2004
). Speci
fi
cally, it may be an effective way for
followers to undermine pioneer advantage and prevent monopoly
power. This study, however, does not consider the lifting of
restrictions on competition as a result of lawsuits or complaints, but
the mere fact that they are initiated or made public. Any erosion of
market share, then, is likely to be due to the defendant's loss of
reputation and the distraction caused to management. This supposi-
tion is in line with previous research that shows how capital markets
react negatively to the threat of lawsuits, anticipating not only the
likely cost an unfavorable verdict will bring but also the resulting
damage to
fi
rm reputation (
Karpoff and Lott, 1993, 1999
).
In summary, the
fi
ndings in a dynamic service industry are similar
tothose of
Makadok(1998)
: Being
fi
rstis an advantageevenwhenit is
easy to copy or improve on competitive actions. In addition to this, in
our case we
fi
nd that non-market measures like legal actions help
reduce pioneer market share advantage.
This study is not free from limitations. Replicating the study with
another measure of results would be desirable.
VanderWerf and
Mahon (1997)
criticize market share as a measure because it in
fl
ates
the chances of
fi
nding pioneer advantages. Using measurements of
fi
nancial performance for a multi-country study like this one, though,
is dif
fi
cult as accounting practices differ from country to country.
Market share is, however, a commonly used measure (
Subramanian
and Nikalanta, 1996
).
A second limitation is the rather rough-and-ready method of
calculating competitive activity
—
the number and different types of
actionstaken.This method doesnot provide informationon therelative
importance of the actions. Distinguishing between a price reduction of
20% and one of 2% would be useful. In highly competitive industries
whereeveryinitiativeiseasytocopy,though,thenumberofcompetitive
actions does provide a reasonable idea of how
fi
rms act
—
as seen by the
numerous studies that have adopted this approach (
Smith et al., 2001
).
This study points to some practical recommendations. The
fi
rst
practical consequence for managers is that even in a service industry
pioneers can sustain their competitive advantage. Likewise, the
research con
fi
rms the effectiveness of legal actions as a competitive
tool. Because litigation is expensive for the economic system (
Baumol,
1993
) and the
fi
rms involved (
Schuler,1996
), however, we need more
analysis of how to improve the effectiveness of market actions. This
will helpto prevent follower
fi
rms fromfalling back on legal actions as
a competitive weapon. And
fi
nally, this paper
fi
nds that the time in
monopoly has an impact on the erosion of pioneer advantage. Indeed,
lead time helps service
fi
rms protect
fi
rst-mover advantage by giving
them the breathing space to build their reputations and promote
client loyalty (
Preissl, 2000; López and Roberts, 2002
). Governments,
then, should open markets and remove all restrictions on competitionas quickly as possible, thereby reducing the temptation to resort to
litigation and regulatory agencies.