First-Mover Advantage Through Distribution: A Decomposition Approach

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 that 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 address the potential endogeneity of entry order, I find first entrants have a positive market-share advantage over later entrants. Specifically, the physical distribution, measured by the number of outlets in a market, drives most of the advantage. Meanwhile, the positive effect on sales performance for the first chain brand becomes nonexistent when I control for the outlet density. This paper further finds that the density of own outlets is nonmonotonically (inverted U) related to sales performance per outlet, suggesting dynamic outlet expansion faces a trade-off between the business-stealing effect in a chain (“cannibalization”) and the advertising effect through repetition.