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Welfare Implications of User Innovation

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  • Henkel, Joachim
  • von Hippel, Eric
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

Suggested Citation

  • Henkel, Joachim & von Hippel, Eric, 2003. "Welfare Implications of User Innovation," Working papers 4327-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    • Handle: RePEc:mit:sloanp:3541
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    More about this item

    Keywords

    User Innovation; Product Diversity; Social Welfare; Inefficiencies;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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