The Impact of Imitative Entry on New Product Innovation and Dynamic Pricing in the Presence of Strategic Customers

Imitative products, known as Shanzhai (山寨) in China, are evident and pervasive around the global market. Different from counterfeit products, the perceived legality of such products is elusive because alleged similarities between innovative and imitative products are generally hard to define. The proposed research aims to investigate the impact of imitative products on the innovation incentive and profitability of an innovator in the presence of the strategic consumer behavior. Specifically, we propose a game-theoretical model which captures the dynamic interaction between an innovator and an imitator in a two-period framework. After choosing the innovation and quality levels of its new product, the innovator dynamically sets a price for each selling period. No binding commitments about future price can be ex ante made. While acting as a monopolist in the first period, the innovator faces competitive entry of the imitator in the second one. The imitator, if decides to enter, clones the innovation invented by the innovator and at the same time determines the quality level of its imitative product. The imitator also reacts to the innovator’s product and pricing strategies by setting a competitive price. All consumers arrive at the outset and strategically make trade-offs between present versus future consumptions. They also compare the benefits of buying from the innovator against that from the imitator. We plan to investigate how the threat of imitative products affects the intertemporal pricing strategies of an innovator facing strategic customers, as compared to myopic ones. In addition, we will explore whether the existence of imitative products is socially desirable. The research results will provide relevant implications for innovating firms and policy makers regarding how to deal with the threat of imitative activities.