How do imitations erode the benefits of first movers?

As we discussed in post Is it always better to be first in Internet space? first movers can benefits from:

• experience/learning curve effects: reduce manufacturing costs 
• secure supply of raw materials if scarce resources 
• establish preferential shelf space, distribution channels and product segment 
• create buyer awareness and high switching costs as entry barrier to imitators 

However, Lee et al (2000) researched that first mover advantages were completely eroded by early and late imitations. Even more interesting is that even late imitation had significant influence on first mover stock market performance.

Early and fast movers achieve greater gains than the late and slow companies. However, they often suffer from new product imitations. Sometimes a fast second move can produce superior results.

Early imitations can be a profitable alternative to moving first, because:

• imitator learns from the first mover’s experience, they can reduce the risk or avoid the mistakes 
• avoid pricing mistakes 
• limit risk exposure and cut developing costs by reverse engineering 

The faster a firm introduces a new product, the higher the abnormal returns; first & second movers will (on the average) report higher abnormal return than late movers.

At a tie of new product imitations, the abnormal returns will be negative for the first movers; the faster a firm imitates, the greater the negative abnormal returns for the first mover (or the less durable the first mover advantages)

Summing up, there are two important implications for the companies:

(1) the faster & earlier a firm introduces a new product, the greater the shareholder wealth effect
(2) imitations impact negatively first movers, even late imitations

Source: Lee, Smith, Grimm & Schomburg (2000): Timing, Order and Durability of New Product Advantages with Imitation, Strategic Management Journal, 21, 1, pp. 23-30.