The User Innovation Paradigm: Impacts on Markets and Welfare
Bocconi University - Department of Management and Technology
Technische Universität München, TUM School of Management
Eric A. Von Hippel
Massachusetts Institute of Technology (MIT) - Sloan School of Management
March 24, 2014
Innovation has traditionally been seen as the province of producers. However, theoretical and empirical research now shows that individual users – consumers – are also a major and increasing source of new products and services. To develop the implications, we build a microeconomic model of a market that incorporates innovation by both users and producers. Our analyses show that, due to two distinct externalities, producers under-invest in supporting user innovation. As markets move from a traditional producer-only situation to a situation including user innovators, we find that firm profits and social welfare unambiguously increase, if firms invest in complementing user innovation activity. If, instead, firms choose to substitute for user innovation via in-house R&D, both firm profits and social welfare are likely to be lower. These findings suggest that both firms and society will benefit from a more informed division of innovation-related labor between users and producers.
Number of Pages in PDF File: 34
Keywords: innovation, user innovationworking papers series
Date posted: June 7, 2012 ; Last revised: March 26, 2014
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