The Monetization of Innovation
59 Pages Posted:
Date Written: July 29, 2020
We develop a dynamic model of the innovative firms that invest in monetization, which represents the process of generating revenues from services provided to customers at no charge. The model reflects the challenges faced by firms that operate via the Internet, whose dynamics are shaped by the decoupling of customer acquisition and revenues growth. 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.
Keywords: Monetization; Innovation; Internet firms
JEL Classification: D20; G31; O31; O32
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