From an economic point of view, an innovation must meet an important criterion: others must be willing to pay for the service. That is fulfilled for a great many people out there with regard to eBay services. The eBay business model is successful. But when the eBay online auction platform was still new, the brothers Oliver, Marc and Alexander Samwer founded a company called Alando. At that time, people quickly spoke of an eBay clone that had been created. About six months later, the three brothers sold their company to eBay.
When new business models work, it invites other companies to make the same or even similar offers if they want to participate in the newly created profit opportunities. But eBay was the first mover. The creators of eBay obviously had creative potential and they were able to realize it. Compared to Alando – the imitator – they were prepared to take the much greater risk, because if they were really the first, they could not know whether their actions would be crowned with economic success. They took the entrepreneurial risk in full.
Shouldn’t imitative founders or copycats participate in the costs of creating or launching a business model?
In this way, free riding could be avoided or at least limited. If there were an effective mechanism to protect the first-mover’s investment, the threat of cost sharing would cast its shadow from the future into the present and prevent potential imitators from actually copying. The mechanism would have to work more or less like an enforceable patent protection.
But it’s worth looking for others who might benefit from copying a business model. These can be found quickly, because if more companies enter a market, all of a sudden all of them tend to have to offer increasingly attractive prices and services to their potential and current customers, compared to their competitors. Customers thus not only strongly benefit from the innovative start-up or the innovation itself, but also from the service and price advantages that are apportioned to them when successful business models are copied by other providers in a competitive environment. Seen in this light, a mechanism that restricts or even prevents copycats would be at the expense of customers and development. Can we want that?
Business models were copied at all times if they were successful.
Copying a business model is nothing unusual. Nor is it a new phenomenon, because that’s the way it was done in the pre-Internet economy ( in my neighborhood, there are probably more than 10 shoe stores within a 200 meter radius). And so there is no need to be surprised or outraged, it simply corresponds to the logic of our economic order when companies compete to damage each other for the benefit of consumers. Competition means: the profit of one is the loss of the other. Competition is predominantly a deliberately established prisoner’s dilemma and that is what we want!
Now perhaps you will agree with me that it was quite brazen and impudent to simply copy eBay and then offer the copy for sale to the company that was copied. Does such an approach violate moral concepts and expectations after all?
I suppose you could make a moral accusation, but I’m afraid it wouldn’t stand up to debate for long. The three brothers acted in accordance with the rationality of the market economy, and at the level of the market in their search for profit opportunities, they simply made some of the moves provided for by the rules of the economic system. I think it is worth remembering that existing rules also represent moral requirements of society.
We could now consider the idea that, in the event of a deficit in the economic system, responsibility should be delegated back from the level of the economic system to those acting within it. After all, they are the ones from whom we must expect this responsibility in individual cases! But this speaks against it:
„No fortress is so strong that money cannot take it.“ Marcus Tullius Cicero (106-43 BC)
It may be that the business people should bear responsibility here, but judgement is highly subjective and, as is well known, to be able to do something requires skill. So pure postulating does not help. Even if the copycats are embarrassed about copying business ideas from others, it can be assumed that they will do it anyway, even though this is a publicly documented failure not to be able to give birth to ideas themselves that are economically even remotely as viable as the original. Embarrassment and shame are, however, feelings that someone must first feel sufficiently strongly for them to develop their steering effect.
From an economic point of view, however, the steering or controlling power of an embarrassing feeling is exhausted if the compensation obtained or even expected in return for it creates a subjective benefit that exceeds the perceived disadvantages of shame and embarrassment. This also includes one’s own awareness of building up a negative reputation in the business world for being a free rider and not being innovative at all. But what is the significance of an embarrassing feeling and reputation for free-rider behavior in relation to the $43 million that eBay apparently paid to be able to vertically integrate Alando? So we’ve come full circle, because from an economic point of view an innovation must meet an important criterion: others should be willing to pay for it.