Elsevier

Telecommunications Policy

Volume 32, Issues 3–4, April–May 2008, Pages 246-261
Telecommunications Policy

Early mover advantages: An empirical analysis of European mobile phone markets

https://doi.org/10.1016/j.telpol.2007.08.006Get rights and content

Abstract

This paper analyzes empirically whether and if so to what extent later entrants in the European mobile telephony industry have a disadvantage vis-à-vis incumbents and early mover entrants. To analyze this question a dynamic model of market share development and a series of static models are considered. There is clear evidence of early mover advantage, mainly caused by the influence of the penetration rate: it pays to enter when still few people have acquired a mobile telephone. Another important determining factor is the Herfindahl–Hirschman Index at the moment of entry: it is significantly easier to enter a highly concentrated industry. Finally, there are important differences between countries, possibly indicating the relative strength of the national regulators.

Introduction

There is a long tradition in economics of studying the question whether incumbent firms have a first-mover advantage vis-à-vis later entrants. Von Stackelberg (1934), for example, early demonstrated in the context of quantity-setting firms that a leader (first mover) is able to secure a larger market share and higher profits than a follower (second mover). There are several reasons why first-mover advantages may arise.1 In the economics (see, e.g., Mueller, 1997) and strategic management (see, e.g., Lieberman and Montgomery, 1988) literature the following factors are mentioned. On the demand side, there is the predominant importance of switching costs (Klemperer (1987a), Klemperer (1987b)). These can arise (i) from the fact that consumers have to make some initial investment in adapting to a seller's product or services, (ii) from firm-specific learning on how to use the product (habit formation), or (iii) because of contractual costs imposed by the firm. With switching costs, firms that already exist in the market when consumers have to make their first adoption choice benefit as later firms have to convince consumers to switch. Other sources for first-mover advantage on the demand side include network externalities and uncertainty about the quality new firms offer (Schmalensee, 1981). On the supply side, there are similar factors working to the advantage of early entrants in the market, most notably sunk costs and economies of scale (Schmalensee, 1982) and cost efficiencies through learning by doing. There are also possible strategic effects, implying that firms find it more difficult to gain market share in markets where many firms are already active.

There is also a large empirical literature on first-mover advantages, mostly in management and marketing journals (see, e.g., Kalyanaram and Urban, 1992; Robinson, Kalyanaram, & Urban, 1994; Urban, Carter, Gaskin, & Mucha, 1986, for an overview). An important part of this literature studies how market shares at a particular moment in time depend on the firm's position in entering the market: what is the typical (long-run) market share of the pioneer firm, the second entrant, etc.? These studies are based on cross-sectional data from many different markets. Kalyanaram and Urban (1992) were the first to study a combination of cross-section data and time series. They also considered the impact of factors such as price differences, relative advertising expenditures, relative quality perception, etc. on the development of market shares. Their model allows a comparison in the rate of convergence to an asymptotic market share level by later entrants. Pioneering advantage is also related to the time a firm (or brand) is in the market. Longer lead time, which is the time between entries, should increase this advantage. Two papers by Huff and Robinson (1994) and Brown and Lattin (1994) confirm this for frequently purchased consumer goods and show that the pioneering advantage declines over time with competition. An overview of different studies can be found in Lieberman & Montgomery (1988), Lieberman & Montgomery (1998) and in Robinson et al. (1994).

The vast majority of empirical studies find that market pioneers have substantially higher market shares than later entrants. This strong association between order of entry and market share is questioned by some authors (e.g., Golder and Tellis, 1993). They argue that most of the empirical studies have potential limitations. One such limitation is the fact that entry is usually treated as an exogenous parameter, whereas timing of entry of a firm might be a choice variable that depends on the perceived market expectations after entry. Moore, Boulding, and Goodstein (1991) extended the Robinson and Fornell (1985) model to allow for the possibility that market entry is endogenous.

This paper studies whether early entrants in the European mobile telephony sector have benefited through a long-term larger market share from their pioneering activities. The paper makes three types of contributions. To the best of the authors’ knowledge, this is the first paper studying the consequences of the order of entry using data from one particular sector where consumers buy infrequently. A disadvantage of traditional cross-section analysis is the potentially large differences between sectors in the data set. Ideally, one would like to have a (large) number of entrants in one or similar market(s). There are not many cases where such conditions apply. European telecommunication in the 1990s is an exception. In the 1990s telephone services were liberalized in many European countries and with the advent of mobile telephony more and more operators entered the different markets over time. The critique of endogenous entry decisions pointed to above does not arise in this context as the timing of entry can (to a large extent) be considered an exogenous variable due to the fact that firms can only enter the market at times the government is willing to sell additional licenses. The data set used contains monthly data about market shares in all Western European countries. The next section describes the data used for this study in more detail, and there it will become clear that there are 45 market introductions in this period and that the development of the mobile telecom sectors is quite similar in the different countries. The sector is therefore an ideal case for considering empirically the impact of the timing of entry into a market.

A second contribution is that this is the first study of its kind on the mobile telephony sector. Mobile telephony has attracted considerable attention, especially in policy circles. Competition authorities and regulators have tried to ensure that the interests of entrants are well taken care of. A consistent empirical investigation of the success or failure of this policy has, however, been lacking up to this point. This study shows how the order of entry has co-determined the evolution of market shares of firms in different countries. Thirdly, because of the nature of the data set, this research is able to estimate whether there are systematic differences between the way market shares of entrants develop in different European countries.

The data set also has its limitations, however. For each country, only data concerning mobile telephony market penetration and the number and names of the active operators and their market shares are available. Given this restriction, there are many potentially interesting questions that cannot be addressed. In particular, there can be no empirical discrimination between the different explanations for first-mover advantages if they do exist. Nevertheless, this research addresses some questions that are of interest, such as the following. What are the main success factors determining the growth in market shares of entrants? In particular, what is the impact of (the growth in) market penetration, measured as the percentage of the population that already has a mobile telephone; and what is the impact of factors such as the market concentration at the moment of entry? If market penetration is an important factor, then demand considerations in general, and switching costs in particular, are likely to be the main source for early mover advantages.

The main empirical studies of the European telecommunications industry are the two papers by Gruber & Verboven (2001a), Gruber & Verboven (2001b). These papers examine a related, but very different question, namely whether the diffusion rate of mobile telephones in a country depends on the degree of competition. They find that such a positive relationship exists, but that it is relatively weak compared to the national differences in diffusion speed. There is, of course, a vast literature on entry in the telecommunications literature (see, e.g., De Bijl and Peitz, 2002; Laffont and Tirole, 2001, for overviews). This literature deals, however, with an entirely different issue, namely that of access regulation on an essential facility.

The rest of the paper is organized as follows. The next section provides a global description of the development of the main features of European telephony markets and it describes the data set used. Section 3 discusses the structure of the models used to analyze the data. Section 4 gives an overview of the different results and provides an interpretation. Finally, Section 5 concludes.

Section snippets

The European mobile telephony markets

At the beginning of the 1990s, most European countries had one incumbent firm offering telephone services to the population.2 Mobile telephony was at its infancy. This incumbent company usually was a state monopolist. At that time European telephony markets were being liberalized and the former state monopolists gradually became privately owned companies with a monopoly position. During the 1990s these

The models

In order to investigate the impact of market concentration and the penetration rate on the development of market shares of entrants, two types of models are investigated: (i) a dynamic model and (ii) a series of static models.

The dynamic analysis attempts to explain the course of development of the market share over the time a firm is present in the market place. To understand the model used, it is useful to reconsider the data presented in the previous section (Fig. 2). Fig. 2 shows that

Analysis

This section discusses the empirical results obtained from estimating the two alternative models.

Discussion and conclusion

This paper has empirically analyzed to what extent later entrants in the European mobile telephony industry have a disadvantage vis-à-vis incumbents and early mover entrants. To analyze this question a dynamic model of market share development and a series of static models have been considered. In the dynamic model, the development in market share is explained by factors such as changes in the penetration rate, the HHI at the moment of entry and a country dummy. The penetration rate and the HHI

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  • Cited by (0)

    The data used for this research are based on the Global Mobile Subscriber Database (GMSD) of the Informa Group. The data are provided to the authors by Proximus (Belgacom Mobile) for whom they carried out a research assignment. The results reported here are a revised version of the research for Proximus. They are very grateful to Proximus for letting them use these data and report these results to a wider audience. The authors are also grateful to three anonymous referees for their very thoughtful comments on earlier versions of the paper. Bijwaard's research is partly supported by the Netherlands Organization for Scientific Research (NWO) nr 451-04-011.

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