Imitation and the diffusion of innovation
Summary
Focus
When a firm develops a new technology, conventional wisdom suggests it should protect that innovation through patents or licensing. Yet many innovating firms tolerate, or even welcome, competitors adopting their innovation. This paper studies Samsung's decision to forgo patent protection for a new dual SIM technology on its handsets in India, where several competing firms rapidly adopted this feature after its introduction in 2007. The paper quantifies a concept called "preference discovery", which helps explain this decision. When an innovator makes its innovation freely available, competitors adopt it and introduce it to consumer segments and at price points that the innovator may not serve directly. In this way, more consumers learn the value of the new technology, thereby also benefiting the innovator.
Contribution
The paper provides evidence for preference discovery and quantifies it by analysing quarterly product level-data on consumer demand and supply between 2007 and 2016. On the demand side, the study captures consumers' choices of mobile handsets and tracks consumer valuations of the new dual SIM technology over time. On the supply side, the study captures the fixed and marginal costs associated with introducing the technology on the market.
Findings
At the start of the sample, consumers did not value the new dual SIM technology, but this changed in 2011. This was precisely when imitators' products gained significant market share. As such, consumers valued the technology more over time. At the same time, the marginal cost of producing dual SIM phones fell by 47% over the sample period. The growth of consumer preference for this technology was entirely attributable to the entry of competing firms. Counterfactual simulations show that patent enforcement would have reduced Samsung's equilibrium profits, as exclusive rights over a technology consumers had not learned to value would have supressed preference discovery.
Abstract
Why would a market leader choose not to patent an innovation? We study Samsung's decision to forgo patent protection for dual SIM technology in the Indian mobile handset market. Using a structural model of demand and supply estimated on quarterly product-level data from the Indian mobile handset industry, we document that rival firms' dual SIM products generated a preference discovery externality. Rival firms' widespread adoption of the dual SIM technology allowed consumers to discover the value of the technology, also benefiting Samsung itself. Counterfactual simulations show that a patent would have suppressed this externality, reducing Samsung's equilibrium profits despite holding monopoly rights. Voluntary non-patenting was therefore privately optimal. Our findings shed light on wider debates about open-sourcing in software and other markets.
JEL classification: L13, O33, O34, L63
Keywords: innovation, patenting, telecom, preference discovery
