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. Data and the online appendix are available at https://doi.org/10.1287/mksc.2017.1029.