Modeling Interactions between User and Producer Innovation: User-Contested and User-Complemented Markets
Technische Universität München, TUM School of Management
Eric A. Von Hippel
Massachusetts Institute of Technology (MIT) - Sloan School of Management
June 7, 2012
There are two ways to diffuse innovations: for “free” via peer-to-peer channels, and at a price via market channels. Economic scholarship and policymaking have traditionally focused upon marketplace diffusion. In this paper, we also consider peer-to-peer diffusion, and so are able to consider the effects of rivalry and complementarity between these two important innovation diffusion channels.
When innovations that are close substitutes are being diffused via both channels, producers face a rival that has rarely been considered in competitive analyses: the option for users to self-supply independent of the market. We show that this additional option for adopters – a “user-contested market” - exerts price discipline on producers, and also increases social welfare. We also find that users can, under some conditions, exert greater competitive pressure than can rival producers.
It is also the case that innovations diffused peer-to-peer are often useful or essential complements to products diffused via the market - a “user-complemented market.” For example, a product may be sold on the market, while techniques for operating that product may largely or entirely be diffused peer-to-peer. We show that producers of essential components can extract value from complements created and diffused by users. Producers will often prefer their complementors to be users rather than other producers. User-complemented markets may even give producers higher profit than a vertically integrated monopoly. We also find that the producer’s preference for user complementors may be too strong from the perspective of social welfare.
We argue that producer-contested and producer-complemented markets are quite common as well as important for theorizing market outcomes. We consider implications for producer firms active in such markets. We also explain that benefits from peer-to-peer diffusion of user innovations are largely an externality from the point of view of innovating users. This market failure may require attention from policymakers.
Number of Pages in PDF File: 36working papers series
Date posted: June 7, 2012 ; Last revised: October 18, 2012
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