Business model innovation and competitive imitation

We provide the first formal model of business model innovation in a game-theoretic framework. Our analysis focuses on sponsor-based business model innovations where a firm monetizes its product through sponsors rather than setting prices directly to its customer base. We provide a comprehensive analysis of the range of possible strategic interactions between an innovative entrant and an incumbent where their choices of business models are endogenously determined and where the incumbent may imitate an entrant's business model innovation once it is revealed. We find that the possibility of competitive imitation means an entrant needs to strategically choose whether to reveal its innovation by competing through the new business model, or conceal it by adopting a traditional, established business model. We also quantify the value of business model innovations, and show that the profit implications for the entrant of inventing a new business model and for the incumbent of responding with business model reconfigurations could be substantial. In particular, the value of business model innovation may be so substantial that the incumbent may strictly prefer to compete in a duopoly rather than to remain a monopolist.