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Obtaining Strategic Advantage from Being Imitated: When Can Encouraging "Clones" Pay?

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  • Kathleen R. Conner

    (School of Business Administration, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

An important business strategy research theme concerns finding ways to minimize competition faced by the firm. This paper, however, focuses on a different set of situations: the model developed suggests that an innovator's best strategy may be to encourage "clones" of its product when a network externality is present. Key factors to consider in assessing whether encouraging cloning is the innovator's best strategy are: (1) the benefit to be derived in terms of added user base "contributed" by the clone sales, traded-off against (2) the unit sales that will be lost to the clone(s). These factors in turn depend upon the strength of the network effect and the degree to which the innovator's product quality is perceived by consumers to be superior to the clone's. The model further suggests that both the innovator and clone earn their highest payoffs when the clone takes the lead in price-setting, i.e., when the clone establishes its own price by considering, for each price it might set, how the innovator will react to that price, and the innovator, as price-follower, responds to the price the clone chooses. The paper demonstrates that the clone-leader/innovator-follower situation represents the unique Nash equilibrium in price-setting strategies. A central implication is that when operating in a network externality environment, instead of a problem to be avoided, clones may be valuable assets to an innovating firm, building up the user base for the innovator's technology by bringing lower-valuing consumers into the market, which in turn makes the innovator's product more attractive to high- and medium-valuing purchasers. Thus when the above-described conditions hold, being cloned can be more profitable for an innovating firm than dominating the market alone.

Suggested Citation

  • Kathleen R. Conner, 1995. "Obtaining Strategic Advantage from Being Imitated: When Can Encouraging "Clones" Pay?," Management Science, INFORMS, vol. 41(2), pages 209-225, February.
  • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:2:p:209-225
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    File URL: http://dx.doi.org/10.1287/mnsc.41.2.209
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    2. John W. Boudreau, 2004. "50th Anniversary Article: Organizational Behavior, Strategy, Performance, and Design in Management Science," Management Science, INFORMS, vol. 50(11), pages 1463-1476, November.
    3. Cheng, Hsing Kenneth & Tang, Qian Candy, 2010. "Free trial or no free trial: Optimal software product design with network effects," European Journal of Operational Research, Elsevier, vol. 205(2), pages 437-447, September.
    4. Crampes, Claude & Langinier, Corinne, 2003. "Following the Follower in the Innovation Game," IDEI Working Papers 216, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Maula, Markku V.J. & Autio, Erkko & Murray, Gordon C., 2009. "Corporate venture capital and the balance of risks and rewards for portfolio companies," Journal of Business Venturing, Elsevier, vol. 24(3), pages 274-286, May.
    6. Qi Wang & Huazhong Zhao & Jinhong Xie, 2016. "Intra-Standard Competition: The Joint Impact of an Installed-User Base and a Supporting-Firm Base in Markets with Network Effects," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 3(3), pages 159-174, December.
    7. Guofang Nan & Xingtao Li & Zan Zhang & Minqiang Li, 0. "Optimal pricing for new product entry under free strategy," Information Technology and Management, Springer, vol. 0, pages 1-19.
    8. Sreekumar R. Bhaskaran & Stephen M. Gilbert, 2005. "Selling and Leasing Strategies for Durable Goods with Complementary Products," Management Science, INFORMS, vol. 51(8), pages 1278-1290, August.
    9. Corinne Langinier & Caroline Boivin, 2005. "Technology Licensing to a Rival," Economics Bulletin, AccessEcon, vol. 12(15), pages 1-8.
    10. Dominique Olié Lauga & Elie Ofek, 2009. "Market Research and Innovation Strategy in a Duopoly," Marketing Science, INFORMS, vol. 28(2), pages 373-396, 03-04.
    11. Baohong Sun & Jinhong Xie & H. Henry Cao, 2004. "Product Strategy for Innovators in Markets with Network Effects," Marketing Science, INFORMS, vol. 23(2), pages 243-254, October.
    12. Sharma, D. Deo & Blomstermo, Anders, 2003. "The internationalization process of Born Globals: a network view," International Business Review, Elsevier, vol. 12(6), pages 739-753, December.
    13. Aidan Hollis, 2002. "Strategic Implications of Learning by Doing," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(2), pages 157-174.
    14. Kranenburg Hans van & Hogenbrink Annelies, 2003. "Determinants of Multimedia, Entertainment, and Business Software Copyright Piracy: A Cross-national Study," Research Memorandum 039, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    15. Young-Ro Yoon, 2008. "Strategic Disclosure of Valuable Information within Competitive Environments," Caepr Working Papers 2008-022, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    16. Stephen M. Gilbert & Sreelata Jonnalagedda, 2011. "Durable Products, Time Inconsistency, and Lock-in," Management Science, INFORMS, vol. 57(9), pages 1655-1670, September.
    17. Sanjay Jain, 2008. "Digital Piracy: A Competitive Analysis," Marketing Science, INFORMS, vol. 27(4), pages 610-626, 07-08.
    18. Etziony Amir & Weiss Avi, 2012. "Inviting Competition to Achieve Critical Mass," Review of Network Economics, De Gruyter, vol. 11(2), pages 1-22, June.
    19. Carsten Fink & Keith E. Maskus & Yi Qian, 2016. "The Economic Effects of Counterfeiting and Piracy: A Review and Implications for Developing Countries," World Bank Research Observer, World Bank Group, vol. 31(1), pages 1-28.

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    Keywords

    strategy; clone; network externality; copying; technology;

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