Innovation Against Imitation: How to Compete with Crowdfunding Copycats

Abstract

Problem definition: New product introductions frequently face retail imitation risks. When start-ups use crowdfunding to finance new products, they expose themselves to an even more severe imitation risk specific to crowdfunding platforms. To mitigate this risk, start-ups can employ a progressive launch strategy by initially offering a preliminary version with fewer features or functionalities. Alternatively, they may opt for traditional bank financing, which only carries retail imitation risk. This paper examines how start-ups can effectively compete with crowdfunding copycats through the aforementioned product launch and financing strategies. Methodology/results: We develop a game-theoretical model to analyze the strategic interactions between a start-up and a copycat. Our findings reveal that start-ups may strategically withhold product quality provision to deter or weaken crowdfunding copycats. The optimal quality provision in crowdfunding exhibits nonmonotonic relationships with both crowdfunding imitation efficiency and crowdfunding market share. We also evaluate the social impact of different financing strategies and reveal that the socially optimal funding choice depends on the implementation of the progressive launch strategy. Notably, contrary to conventional wisdom, increasing crowdfunding copycat efficiency does not consistently improve consumer surplus or social welfare. Managerial implications: Although crowdfunding offers numerous advantages, start-ups considering this approach must recognize and address the potential threats posed by copycat imitation. Our research indicates that start-ups seeking external financing can effectively use progressive launch strategies to counter crowdfunding copycats—an approach that generally requires less time and resources than traditional intellectual property protection methods. Funding: G. Xiao acknowledges support from the National Natural Science Foundation of China [Grant 72422016] and the Research Grants Council of Hong Kong [GRF Grant PolyU 15500923]. X. Guo acknowledges support from the Research Grants Council of Hong Kong [GRF Grant PolyU 15507318] and the National Natural Science Foundation of China (72293564/72293560). Z. Chen acknowledges support from the National Natural Science Foundation of China [72542003]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2024.0912 .