Imitation benefits innovators via preference discovery

A new Bank for International Settlements (BIS) working paper finds that allowing imitation can be privately optimal for innovators. The study shows that rival firms' adoption of new technology generates a 'preference discovery externality' that benefits the original innovator.

Samsung's strategic non-patenting

The research quantifies a mechanism, 'preference discovery,' that explains why an innovator might forgo patent protection.

The authors examine Samsung's decision not to patent dual SIM technology in the Indian mobile handset market.

Despite holding related patents globally, Samsung allowed widespread imitation by dozens of rival firms.

This broad adoption by competitors, including small local brands, exposed a wider consumer base to the technology, leading them to discover its value.

This expanded market awareness ultimately increased consumer willingness to pay for dual SIM, benefiting Samsung itself.

Counterfactual simulations demonstrate that a patent would have suppressed this externality, reducing Samsung's equilibrium profits despite monopoly rights, making voluntary non-patenting privately optimal for the firm.

This finding contributes to debates on open-sourcing in software and other markets.

From negative WTP to market dominance

The study uses a structural model of demand and supply, estimated on quarterly product-level data from the Indian mobile handset industry between 2007 and 2016.

Key findings include that consumer willingness to pay (WTP) for dual-SIM was initially negative (–$74 in 2007) but crossed into positive territory around 2011, coinciding with imitators achieving majority market share.

The marginal cost premium for dual SIM production also fell significantly by 47% over the sample period, consistent with learning-by-doing and scale economies.

By 2016, dual-SIM devices accounted for 94% of handset sales by volume in India, offered by 44 out of 46 companies.

The preference discovery externality, driven by imitators' market presence, was substantial enough to make non-enforcement of patents beneficial for Samsung.

A nuanced view on intellectual property

This paper challenges the conventional wisdom that strong intellectual property protection always maximizes innovator profits.

It provides a compelling, quantifiable mechanism for how imitation can expand markets and benefit the original innovator.

The findings are highly relevant for policymakers and firms navigating rapidly evolving technological landscapes, particularly in areas like open-source AI and pharmaceuticals.

This suggests a more strategic and less absolute approach to patenting, especially where consumer education and market expansion are critical.