Product Innovation in Weak Appropriability Regimes: Innovative Style Without Superior Quality

Abstract

Competition with counterfeiters is a widespread problem in many industries. However, existing research does not provide specific recommendations on the innovation strategies of authentic firms that operate in weak appropriability regimes. Our study focuses on two important dimensions of product innovation – vertical and horizontal differentiation – to test whether and how different innovation strategies can affect the likelihood of entry by counterfeiters. We test our framework by exploiting detailed product-level data on the complete Gundam product family, a popular line of plastic model kits designed and manufactured by the Japanese firm Bandai Namco between 1980 and 2010. Our novel empirical approach and unique dataset allows us to match authentic and counterfeit versions of the same product. Results show that horizontal differentiation is associated with increased likelihood of counterfeiting and that this effect is positively moderated by vertical differentiation. This finding is interesting and surprising, as it suggests that there is potentially strategic variance to exploit in the innovation efforts of authentic firms. Under weak appropriability regimes, if the aim is to forestall counterfeiting, firms may be best served focusing on the horizontal rather than on the vertical dimension of product differentiation.