Performance Effects of Imitative Entry

Abstract

This paper examines how waiting to imitate a product affects the performance of the imitator compared to the innovator. Specifically, we address two research questions. Under what conditions does imitation erode the advantage of the innovator? What strategies of imitators help overcome the innovator's advantage? Our main argument is that the increasing availability of information on the innovator's product increases the imitator's returns to waiting. With this increasing availability of information, imitators' products transition from those that are horizontally differentiated (products are similar in quality but differ in their attributes) to those that are vertically differentiated (products differ in quality). Thus, we hypothesized that shifts in the nature of competition over time from horizontal differentiation to vertical differentiation accounts for why the innovator's advantage is not preserved. Imitation timing simply reflects the uncertainty inherent in imitation efforts. One such uncertainty is the extent of product differentiation that the imitator can achieve. We develop several hypotheses that elaborate this basic intuition. We obtained detailed data on innovator-imitator competition in the branded drug industry to test the hypotheses. All our hypotheses are supported. The main contribution of the paper is in showing that the nature of product differentiation in product categories is endogenous to the imitative entry decisions of firms.

Keywords: imitation, entry timing, product differentiation

JEL Classification: D21, D23, D43, D81, D83, L11, L15, L65, M21, O31