Welfare Implications of User Innovation

The Journal of Technology Transfer, Volume 30, pages 73–87 (2004)

MIT Sloan Working Paper No. 4327-03

15 Pages Posted: 25 Jul 2003 Last revised: 7 Jul 2022

See all articles by Joachim Henkel

Joachim Henkel

TUM School of Management - Technical University of Munich (TUM)

Eric A. von Hippel

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

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Date Written: June 1, 2003

Abstract

The literature on new goods and social welfare generally assumes that innovations are developed by manufacturers. But innovation by users has been found to also be an important part of innovative activity in the economy. In this paper we explore the impact of users as a source of innovation on product diversity, innovation, and welfare. We examine the impact of user innovation on inefficiencies that bias the provision of new goods, and find that most are either alleviated or non-existent for user innovation. There are three major reasons for this. First, user innovations tend to complement manufacturer innovations, filling small niches of high need left open by commercial sellers. Second, user innovation helps to reduce information asymmetries between manufacturers and users. Third, user innovations are more likely to be freely revealed than manufacturer innovations. We conclude that, compared to a counterfactual world without such innovation, social welfare is most likely to be increased by the presence of user innovation. We derive implications for policy makers and managers.

Keywords: User Innovation, Product Diversity, Social Welfare, Inefficiencies

JEL Classification: D62, O31, O38

Suggested Citation

Henkel, Joachim and von Hippel, Eric, Welfare Implications of User Innovation (June 1, 2003). The Journal of Technology Transfer, Volume 30, pages 73–87 (2004), MIT Sloan Working Paper No. 4327-03, Available at SSRN: https://ssrn.com/abstract=425820 or http://dx.doi.org/10.2139/ssrn.425820

Joachim Henkel

TUM School of Management - Technical University of Munich (TUM) ( email )

Arcisstr. 21
Munich, D-80333
Germany

Eric Von Hippel (Contact Author)

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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