The Two Contrary Effects of Imitation

I consider the strategies of the firms related to develop a new technology. There are innovation and imitation. I examine the incentives of innovation and imitation. I show that for innovation, if the innovator faces imitation by his rivals, the investment to innovate will likely shrink. The incentive of innovation is a function of the cost advantage by innovation and the competition disadvantage by imitation. For imitation, the more the imitator's marginal cost reduces, the higher the imitation incentive stimulates. The incentive of imitation is a function of the marginal cost advantage through imitation. I characterize the two contrary effects of imitation, “the optimistic effect” and “the pessimistic effect.” The optimistic effect of imitation is larger than the pessimistic effect from the viewpoint of the society. That is, although imitation weakens the incentive of innovation, it can benefit on the whole society. It is not under the viewpoint of quality but from the viewpoint of quantity.