To exploit first mover advantages, pioneers may be motivated
to amass customers before rivals enter the market. Likewise,
when they enjoy increasing returns due to network effects,
static scale economies, or learning effects, companies
have incentives to invest aggressively in upfront marketing.
This paper presents econometric analysis of factors
that determined the intensity of Internet companies'
investments in growth, and analyzes the long term economic
consequences of such investments. Results indicate that
first movers spent significantly more on upfront marketing
than non-pioneers. Contrary to expectations, however,
firms in markets that exhibited increasing returns did
not spend more on their early customer acquisition efforts
than other sample companies.
A few sample companies earned very high long term returns,
while the majority destroyed value for investors. Most
firms spent heavily on their early marketing efforts.
Although the typical sample company did not earn positive
returns, heavy upfront spending was nevertheless economically
rational. In most cases, reducing marketing outlays
would have worsened a bad outcome, consistent with an
inverted "U" relationship between long term
returns and upfront marketing investments. Thus, the
typical sample company invested in marketing, ex ante,
at levels close to those that would have maximized returns,
observed ex post.
EM
44 pages
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