Does imitation increase or decrease demand for an original product? Understanding the opposing effects of discovery and substitution

Research Summary This article studies how the entry of an imitative product influences the demand for the original, in markets with a large number of products where consumers are not aware of most products. We suggest that the release of an imitative product triggers two countervailing forces: a discovery effect that increases awareness and demand for the original, and a substitution effect decreasing that demand. When the imitation is horizontally differentiated, the substitution effect is weaker, and the discovery effect leads to increased demand for the original, particularly so when the original is less well-known. However, when the imitation is vertically differentiated, the discovery effect does not benefit the original, and the demand decreases given the substitution effect. We test our theory in the context of 3D-printable products. Managerial Summary Imitative products typically harm the performance of the original product. This is in part the rationale for deterring imitation by acquiring intellectual property (IP) rights. However, as we demonstrate, the release of an imitative product may increase discovery of the original product, and therefore demand for it. In markets with a large number of products, products typically compete for attention, and an imitative product may serve as a channel through which attention spills over from the imitation to the original. This effect is more pronounced when the original product is less well-known. This suggests that, under certain conditions, firms may benefit from pursuing a more open IP strategy that encourages imitation. Examples of marketplaces where imitation may increase demand for the original include those for music, e-books, software, and mobile apps.