Exclusive or Inclusive? Technology Opening, Innovation, and Imitation Strategies Under Uncertainty

Firms usually patent their technologies to prevent rivals imitation, while others opt to open technology to avoid fierce competition facing threats from costly innovation. The entrant firm also faces a dilemma: imitate the opened technology to save costs or innovate to win consumers preferences. Moreover, with innovation outcome uncertainty, the entrant firm struggles to enter the current market, prompting the incumbent firm to close technology for monopolizing the current market and tolerate innovation threats. This paper builds a three-stage Stackelberg model to examine how competing firms develop technology opening and innovation strategies under technological uncertainty and customers biases towards imitation. Equilibrium results indicate that with minor consumer bias for imitation, the incumbent firm closes its proprietary technology to expect technology innovation risks, and the entrant firm innovates to enter the market; with moderate bias, the incumbent firm adopts the technology opening strategy to ease competition, and the entrant firm chooses imitation to save costs; otherwise, the incumbent firms technology strategy makes no difference, and the entrant firm only chooses innovation. The impacts of firms' technological decisions on social welfare are studied, which show that either technology opening or innovation may hurt social welfare. We find that whether technology opening, imitation, or innovation should be subsided is highly dependent on the technology innovation risks. A technology subsidy scheme is designed to save on innovation costs and protect customer suplus.