First-Mover Advantage through Distribution: A Decomposition Approach

Abstract

Whereas the extant literature on entry-order effects establishes that first entrants often earn higher market shares ("market-share advantage"), the literature on distribution suggests increased distribution has a positive effect on sales. Can distribution help us better understand entry-order effects on market shares? This paper examines how the first entrant in a geographical market achieves a market-share advantage through distribution. For this purpose, I propose a simple method of decomposing sales into physical distribution and sales performance. The data come from a manually collected panel on six major Japanese convenience-store chains from 47 geographical markets between 1991 and 2007. Using an instrumental variable approach to deal with the potential endogeneity of entry order, I find the market-share advantage for the first chain brand is positive. Specifically, the physical distribution, measured by the number of outlets in a market, drives most of the advantage. This paper further finds the density of own outlets is nonmonotonically related (inverted U) to sales performance per outlet, suggesting dynamic outlet expansion faces a trade-off between business-stealing effects within a chain ("cannibalization") and advertising effects through repetition.