The Monetization of Innovation
60 Pages Posted: 19 Aug 2020 Last revised: 25 Jul 2022
Date Written: July 29, 2020
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
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