The User Innovation Paradigm: Impacts on Markets and Welfare

40 Pages Posted: 7 Jun 2012 Last revised: 4 Aug 2015

Alfonso Gambardella

Bocconi University - Department of Management and Technology

Christina Raasch

Kühne Logistics University (KLU)

Eric A. von Hippel

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: July 2015

Abstract

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.

Keywords: innovation, user innovation

Suggested Citation

Gambardella, Alfonso and Raasch, Christina and von Hippel, Eric A., The User Innovation Paradigm: Impacts on Markets and Welfare (July 2015). Available at SSRN: https://ssrn.com/abstract=2079763 or http://dx.doi.org/10.2139/ssrn.2079763

Alfonso Gambardella

Bocconi University - Department of Management and Technology ( email )

Via Roentgen 1
Milan, MI 20136
Italy

Christina Raasch (Contact Author)

Kühne Logistics University (KLU) ( email )

Großer Grasbrook 17
Hamburg, 20457
Germany

Eric Von Hippel

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E62-455
Cambridge, MA 02142
United States
617-253-7155 (Phone)
617-253-2660 (Fax)

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