Imitation and R&D Incentives

   We know that product and process innovation can explain us how technological advance can maximize firm’s profit, but it also it may state a potential problem in economics called imitation problem, situation in which firm’s rivals may imitate newly invented product or process, so that profit gained by firm that initiated R&D process is greatly reduced. An example can be, a firm buys a high-quality notebook from other one that has a great success in market sales and study it piece by piece and then reproduce entire new model in a computer that is an imitation of original one. This technique was used many times in our world’s market. This type of imitation is actually a legitimate one, so it is often the main path to widespread of innovation and diffusion.
   However, the dominant firm in an industry that is making big profits may let other small firms to spend great quantity of money on product and process of innovation and analyze their success and losses. This firm then quickly can become the second firm that uses these innovations if they are successful. This is called fast-second strategy, strategy by which a second firm uses innovation and R&D results of another firm, so that latter one incurs all cost of innovation and R&D expenditures.

Benefit of being first
   Fast-second strategy and imitation may raise an important question: is there any incentive to be the first firm that incurs all cost and expenditures if the competitors may imitate innovated product? Why not imitate others successful innovations and let them bear the cost of R&D and innovation process? Even this idea is a plausible there are some advantages and protections for the firms that take the lead in this innovation competition. Let’s describe some of them:

Patents
   Some technological innovations and breakthroughs may be patented. If a product or production process in patented it can’t be imitated for about two decades. The purpose of patents is to reduce imitation and to help other firm to engage in R&D with possibility of gaining of high profits. And if for example one firm clones the new innovated products of another firm then the latter one might be included in a patent-infringement lawsuit and pay back all revenues lost by the firm which patented its product.

Copyright and trademarks
   Copyrights protect publishers of books, various articles, movies, musical compositions from having their works copied. Trademarks give the exclusive opportunity to innovators to use a specific product name (Nokia, Ferrari, McDonald’s). These legal protections help innovators to increase their incentive for product innovation.

Brand Recognition
   Brand-name recognition gives innovator a major marketing advantage for several years. Consumers identify a product with the firm that first introduced and popularized it in the world’s market, for example Kellogg’s Corn Flakes, Sony’s Walkman).

Trade secrets
   Some innovations however include some trade secrets, without which imitation isn’t possible. A very popular example is Coca-Cola which has a secret formula for its drinks. Other firms have some special production technique that is known only to them. A relative advantage is learning-by doing, kind of specialization that allows them to achieve cost reductions. The innovator’s low cost may enable to continue its profits even after imitations are spread in the market.

  Time Lags
   Time lags between innovation and imitation often help innovating firms to realize high economic profits, since the firm that imitates needs some time to learn properties of new innovated good. Once imitators have learnt all these particularities of that good, it needs to design a substitute good and construct a factory that will produce it. Different entry barriers like big amount of funding, economies of scale, and price-cutting may increase the time between innovation and imitation. That’s why it may take several years before rival firms can successful imitate new product and earn some innovator’s market share. That’s why innovator will continue its profits.

Buyouts
   Another advantage of being first may be a buyout, purchase of innovating firm by a larger firm. In this case innovative entrepreneurs will get their rewards immediately in form of cash or shares from the purchasing firm, rather than waiting for uncertain future profits from their own production and efforts.

Capital Goods,Specialization…

Technology and Capital Goods
   Market system needs extensive use of capital goods. Supplier’s self-interest, competition, willingness for high-revenue and freedom of choice create a motivation for using technological advantage. In order to have high income an economic unit should grow very fast and have a high efficiency at output production, that’s why suppliers are building capital goods like: machineries, tools that create facilities for goods storage and transportation.
The only way to acquire a high efficiency at production is to rely on roundabout production.

  Division of labour
   Human specialization, which is also called division of labour, contributes society’s output in several ways.

• Specialization helps us to take advantage of our differences. For example one which are better at math will be an accountant, so this person will do his/her job faster than one which is good at writing poems.
• Specialization helps to improve our abilities by doing. If we devote our time to a single task, we will be able to do it faster and more efficient than if we would do multiple actions in the same period of time.
• Specialization saves time. By using all our time to a single task we don’t have losses in time, in contrast to when we shift among more jobs.

Because of this reasons specialization help a society to create more output from the same scarce resources.

   Money
   In economics money has diverse functions, but the most important of them is using it as a medium of exchange. It makes trade easier.
Let’s take a case in which money doesn’t exist. So the only way some countries can exchange their goods is by barter-exchange of one good by another one. But, here some problems arise. One of them is coincidence of wants between demanders and suppliers. Let’s take one case. Country one (excess potatoes, needs carrots), country two (excess carrots, needs apples), country three (excess apples, need potatoes). In this case trade can occur, but what if country three had excess potatoes and demanded apples? For sure, barter would be very difficult or even impossible. That’s why using money is so convenient. One important property of money is that it should be accepted by sellers in exchange for their goods. The fact that different countries have different currencies makes international trade a little bit difficult, but we shouldn’t forget that there are right now currency exchangers that are very useful if we want to buy some goods from a country that has a different currency. Money helps countries to get some amount of goods that are even impossible without international trade, because that point lies outside of PPC.

Key Terms:
Roundabout Production-The construction and use of capital to aid in the produc­tion of consumer goods.
Specializa­tion-The use of the resources of an individual, a firm, a region, or a nation to produce one or a few goods and services.
Division of Labour-Divid­ing the work required to produce a product into a number of different tasks that are per­formed by different workers.
Barter- The exchange of one good or service for another good or service.