The Monetization of Innovation

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See all articles by Missaka Warusawitharana

Missaka Warusawitharana

Board of Governors of the Federal Reserve System

Francesca Zucchi

Federal Reserve Board

Date Written: July 29, 2020

Abstract

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

Suggested Citation

Warusawitharana, Missaka and Zucchi, Francesca, The Monetization of Innovation (July 29, 2020). Available at SSRN: https://ssrn.com/abstract=

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)

Federal Reserve Board ( email )

20th and C Street NW
Washington, DC 20551
United States

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