The Monetization of Innovation

60 Pages Posted: 19 Aug 2020 Last revised: 25 Jul 2022

See all articles by Missaka Warusawitharana

Missaka Warusawitharana

Board of Governors of the Federal Reserve System

Francesca Zucchi

European Central Bank

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Date Written: July 29, 2020

Abstract

We develop a dynamic model for digital service firms, which invest in monetization to generate revenues from services provided to customers for free.  Our model captures and explains why such firms often build a large customer base and become highly valued while continuing to suffer losses---traditional models would struggle to explain this pattern. Counterfactual analysis reveals that monetization uncertainty slows technological advancement by diverting resources away from innovation.  We also show that regulation aimed at protecting user privacy has sizable adverse effect on firm size and the quality of the offered service but, perhaps surprisingly, reduces firm unprofitability.  In turn, regulation encouraging competition supports firms' inventiveness.

Keywords: Monetization; Innovation; Digital Services Firms

JEL Classification: D20; G31; O31; O32

Suggested Citation

Warusawitharana, Missaka and Zucchi, Francesca, The Monetization of Innovation (July 29, 2020). Available at SSRN: https://ssrn.com/abstract=3663148 or http://dx.doi.org/10.2139/ssrn.3663148

Missaka Warusawitharana

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francesca Zucchi (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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