Working Paper: CEPR ID: DP4063
Authors: Joachim Henkel; Eric von Hippel
Abstract: The literature on new goods and social welfare generally assumes that manufacturers develop innovations. 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: inefficiencies; product diversity; social welfare; user innovation
JEL Codes: D62; O31; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| user innovation (O36) | social welfare (I38) |
| user innovation (O36) | inefficiencies (D61) |
| user innovations (O36) | manufacturer innovations (O39) |
| user innovations (O36) | inefficiencies (D61) |
| user innovations (O36) | information asymmetries (D82) |
| user innovations are more likely to be freely revealed (O36) | social welfare (I38) |
| user innovations (O36) | match between user needs and products (L15) |
| user innovations offset negative effects of business stealing (O36) | redistribute surplus to users (D33) |