OBTAINING STRATEGIC ADVANTAGE FROM BEING IMITATED - WHEN CAN ENCOURAGING CLONES PAY

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 produ ct when a network externality is present. Key factors to consider in a ssessing whether encouraging cloning is the innovator's best strategy are: (1) the benefit to be derived in terms of added user base ''contr ibuted'' by the clone sales, traded-off against (2) the unit sales tha t 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 eac h price it might set, how the innovator will react to that price, and the innovator, as price-follower, responds to the price the clone choo ses. The paper demonstrates that the clone-leader/innovator-follower s ituation represents the unique Nash equilibrium in price-setting strat egies. A central implication is that when operating in a network exter nality environment, instead of a problem to be avoided, clones may be valuable assets to an innovating firm, building up the user base for t he innovator's technology by bringing lower-valuing consumers into the market, which in turn makes the innovator's product more attractive t o high- and medium-valuing purchasers. Thus when the above-described c onditions hold, being cloned can be more profitable for an innovating firm than dominating the market alone.