M&SOM Review

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As every savvy consumer knows, successful products are often quickly copied by lower-cost producers (copycats). This can be observed in a wide variety of manufactured items, from pharmaceuticals to electronics. These copycat firms piggyback on the success and creativity of others by quickly introducing their own facsimile of a much more expensive product. To combat the copycats, firms may turn to legal means. However, lawsuits are often difficult as the copycats skate the fine line between stealing designs and inspiration. In some cases, government protection in the form of patents can be helpful (for example, audio equipment manufacturer Klipsch has sued competitor Monoprice for patent infringement, and fashion firm Burberry includes legal action as one of its strategic initiatives). In other cases, a manufacturer may choose to compete on price, hoping that consumers will stay loyal in exchange for price concessions (for example, research has shown that two years after the introduction of a generic version of pharmaceuticals the cost of treatment falls by an average of 35.1%). In still other situations, the designer of an original product may be left to basically ignore the copycat for lack of effective options.

Even more troubling, savvy consumers have noticed the ascension of the copycat, and are now not only aware of the eventual copycat offering but are willing to wait in some cases, forgoing the original product altogether. This is often countered by manufacturers with a “buy now” campaign, touting the immediate benefits of the genuine product over the future value of a copycat. However, the effectiveness of these approaches is questionable given the increasing numbers and aggressiveness of copycats.

We study the interaction among an original manufacturer, a copycat, and consumers in Pun and DeYong (2017). The manufacturer initially has a monopoly position and makes marketing (e.g., advertising or celebrity endorsements), product design, and pricing decisions. But after a time the copycat may produce its own version of the product if the market is attractive enough to warrant the effort, leading to a possible head-to-head competition between the two. The manufacturer is left with one of three strategies when facing the threat of a copycat:

  1. Deterrence by credible threat—in some cases, the manufacturer would be best off to directly challenge any copycat by reducing advertising (to reduce the attractiveness of the market and reduce marketing costs at the same time) while cutting prices to engage in a price war with the copycat. The end result of any actual challenge would be a market that is left unattractive to the copycat. Since the copycat can foresee this possibility, it will never enter the market in the first place.
  2. Deterrence by actual action—in other cases, the threat of a price war is insufficient to deter the copycat from entering the market. However, after the manufacturer takes steps to make the market unattractive (at the cost of reduced profits) the copycat will not enter the now unattractive market.
  3. Failed deterrence by ineffective threat—in still other situations, the market is attractive to the copycat but the manufacturer is unwilling to take steps to make the market less appealing. This is common with highly profitable items, where a manufacturer is unwilling to sacrifice a profitable high-end market for the sake of deterring a low-end copycat. Instead, the manufacturer cedes the low-end consumers to the copycat. This does, however, still leave the manufacturer with the option to pursue legal/government means of ending the copycat threat (for example, a fashion manufacturer may not reduce prices, but will instead aggressively pursue copycats who duplicate the original product too closely).

By addressing product design and marketing decisions, along with consumer characteristics such as patience and strategic behavior, we are able to identify some intriguing aspects of the manufacturer/copycat competition. For example, even if a manufacturer could improve the quality of its product at no cost, it may not be better off to do so because of the threat of a copycat. While the manufacturer could charge a higher price for its improved product, this also leaves room for a copycat to introduce its own product. To deter the copycat, the manufacturer must then reduce advertising and prices, leading to a net loss as the adjustments to fight the copycat outweigh the advantages of a higher quality product. This shows that the manufacturer is a victim of its own success. Another issue is the buy-now mentality used to induce customers to purchase immediately rather than at a later time. While this would seem to be a good strategy to deter copycats (if the customers buy before the copycat product is available this should reduce the threat of copycats), the benefits of this strategy only extend to a certain point. In cases where customers already have a propensity to purchase early, a further increase in this buy-now mentality may force the manufacturer to reduce prices to a greater extent at some point in the future to attract the remaining customers who did not purchase earlier.

Copycatting has become a severe problem for any multinational firm, and our paper provides some insights about how the customers’ forward-looking purchasing behavior affects the product design and buy-now promotion strategies.

 

Reference

Pun H, DeYong GD (2017) Competing with copycats when customers are strategic. Manufacturing Service Operations Management 19(3):403–418.

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