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 increasingly important source of new product and service designs. In this paper, we build a microeconomic model of a market that incorporates demand-side innovation and competition. We explain the conditions under which firms find it beneficial to invest in supporting and harvesting users’ innovations, and show that social welfare rises when firms utilize this source of innovation. Our modeling also indicates reasons for policy interventions with respect to a mixed user and producer innovation economy. From the social welfare perspective, as the share of innovating users in a market increases, profit-maximizing firms tend to switch “too late” from a focus on internal R&D to a strategy of also supporting and harvesting user innovations. Underlying this inefficiency are externalities that the producer cannot capture. Overall, our results explain when and how the proliferation of innovating users leads to a superior division of innovative labor involving complementary investments by users and producers, both benefitting producers and increasing social welfare.
Number of Pages in PDF File: 40
Keywords: innovation, user innovation
Date posted: June 7, 2012 ; Last revised: March 28, 2015
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