The Inauthenticity in Legitimacy : Identity Trade-Offs in Firms’ New Market Entry

Is being the first entrant in a nascent industry an advantage or a disadvantage? Both institutional theory and population ecology suggest that in a nascent industry an increase in the number of firms legitimize all industry members. However, late entrants may suffer penalties because audiences interpret their late entry as a lack of authenticity associated with low customer commitment. In this paper, we theorize and test how the order of entry shapes firms' competitive outcomes. Using an experimental approach, we disentangle two at times countervailing forces–audiences' simultaneous preference for authenticity and legitimacy. We distinguish between "core value" and "symbolic features" in products or services, and argue that the penalty for follower firms is likely to arise when the late entrant firms share even the symbolic features of their predecessor. We test our theory with an online experiment using examples of startup companies in the healthcare industry. The results show that a late entrant suffers from lower levels of market selection when it shares both the business model (core value) and the website design (symbolic features) with the first entrant, but this "copycat discount" is significantly alleviated when the late entrant does not share the first mover's symbolic features. However, while direct measures of legitimacy show a strong effect on market selection, we do not find support that this is impacted by density.