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The User Innovation Paradigm: Impacts on Markets and Welfare

Author

Listed:
  • Alfonso Gambardella

    (Department of Management and Technology and Center for Research in Innovation, Organization and Strategy, Bocconi University, 20136 Milan, Italy)

  • Christina Raasch

    (TUM School of Management, Technische Universität München, 80333 München, Germany)

  • Eric von Hippel

    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

Abstract

Innovation has traditionally been seen as the province of producers. However, theoretical and empirical research now shows that individual users—consumers—are also a major and increasingly important source of new product and service designs. In this paper, we build a microeconomic model of a market that incorporates demand-side innovation and competition. We explain the conditions under which firms find it beneficial to invest in supporting and harvesting users’ innovations, and we show that social welfare rises when firms utilize this source of innovation. Our modeling also indicates reasons for policy interventions with respect to a mixed user and producer innovation economy. From the social welfare perspective, as the share of innovating users in a market increases, profit-maximizing firms tend to switch “too late” from a focus on internal research and development to a strategy of also supporting and harvesting user innovations. Underlying this inefficiency are externalities that the producer cannot capture. Overall, our results explain when and how the proliferation of innovating users leads to a superior division of innovative labor involving complementary investments by users and producers, both benefitting producers and increasing social welfare.

Suggested Citation

  • Alfonso Gambardella & Christina Raasch & Eric von Hippel, 2017. "The User Innovation Paradigm: Impacts on Markets and Welfare," Management Science, INFORMS, vol. 63(5), pages 1450-1468, May.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:5:p:1450-1468
    DOI: 10.1287/mnsc.2015.2393
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    References listed on IDEAS

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