Tuesday, January 29, 2008

Front Running

"It takes 8% more energy to lead than to follow" - Bill Bowerman to Steve Prefontaine in Without Limits. Bowerman was trying to coach Pre out of the habit of front-running. Bowerman thought Pre could perform better in some races by drafting instead of letting the other guys draft him. I'm not sure how accurate the 8% figures is...I imagine it's a lot higher in biking.

Anyway, I was wondering if taking the lead uses more energy in signaling games. When you have a price leader, they will suffer lower sales in the initial period before other firms raise their price and follow suit. The close-behind followers may even incur some of this cost, which is not true in running. The cost for the close-behinds in running is that they may be going slower than they could, which would result in a slower finishing time...but isn't the goal to win the race?

Taking on a leadership role in beginning a romantic relationship can also be costly (maybe more than 8%!). The person who makes the first move risks looking foolish or revealing information about themselves which may cost them a strategic move later. Maybe that's why many such signals are weak initially.

Every race must have a leader, although this leader can change. One firm has to move first if prices are to change (from the assumption that all firms are charging the same price in an oligopolistic setting). A relationship may never get started if one of the interested parties does not signal that they want to begin. These (signaling) leaders make everyone else better off without receiving compensation except for what they gain by their own actions.

Sometimes the leadership role can go back and forth. In a race, the top 2-3 runners can rotate the lead until someone can't keep up any more. In the market, it's hard enough to establish one price leader that once they are established, it isn't feasible to alternate firms (except in a duopoly case where the leader can take back their new price if the other firm does not follow). However, in the starting of a relationship, it is impossible to alternate the lead with the other person. Once taken, the leader either wins the race or trips over the steeple and falls face first into the water pit.
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