Does the Middle Conform or Compete? Risk and Quality Thresholds Predict the Locus of Innovation

Abstract

Where does innovation come from? This research models producer incentives to innovate with a focus on the role of audiences in constructing quality thresholds within markets. Market audiences create mechanisms for identifying the highest quality producers in a market. I highlight a key distinction between fixed quality thresholds (such as accreditations) and quality thresholds that respond to producer quality (such as rankings or best-of-breed awards). Producers evaluate how the inherently risky nature of innovation interacts with these thresholds. The model predicts conditions under which innovation emerges from the best producers in a market, from producers near the threshold in a market, from both, or from nowhere. Such predictions generalize and simplify several existing organizational theories of innovation.