Competing with Knockoffs: The Role of Intellectual Property Sharing and Advertising

Abstract

In this paper, we examine the competition between an innovative firm with proprietary technology and a knockoff competitor. Specifically, we explore two strategies that the innovative firm can employ to address the knockoffs: (1) sharing its intellectual property (IP) for free, and (2) launching an anti-knockoff advertising campaign to reduce consumers’ social rewards from purchasing knockoffs. Our results are as follows. First, when consumers, on average, highly value the social image associated with their purchases (indicating a more severe knockoff problem), (i) even if launching an anti-knockoff advertising campaign incurs no cost, it may still be unprofitable for a firm to pursue this strategy, and (ii) sharing its technology for free with a knockoff competitor (i.e., the IP-sharing strategy) can be a profitable choice for the firm. Third, if the technology is specifically related to green innovation, then from an environmental perspective, while both strategies can help improve the environment, the open-source strategy may lead to even better environmental outcomes when market demand is highly sensitive to a product's green quality. Finally, it may be optimal for the innovative firm to simultaneously adopt both the combative approach (i.e., anti-knockoff advertising) and the cooperative approach (i.e., IP sharing).