Pricing of Consumer Innovations

Abstract

Research has documented the importance of consumers as a source of innovation. Consumers primarily innovate out of non-monetary motivations, such as use interest, learning and social rewards. Nonetheless, increasing numbers of consumer innovators are commercializing their work. Rooted in their different motivation to innovate, consumer innovators' pricing decisions may differ systematically from those of commercial firms. The consideration of this background may also affect price evaluations of customers. Investigating these aspects is relevant for (a) consumer innovators, to shape and validate marketing strategies, (b) business administration, to respond to consumer innovators as competitors, and (c) economists, to understand the market impacts of the commercialization of consumer innovations. By fusing extant pricing knowledge with consumer innovation theory, this dissertation investigates (1) how consumer innovators set prices and (2) how customers react to consumer innovation prices. The research questions are answered by two empirical, sequential mixed methods studies.The first study compares firm and consumer innovation prices. A quantitative matchedpair analysis of 4,242 computer games reveals that, compared to firms, consumer innovators systematically set lower prices and align prices more to the provided customer value and less to the incurred development costs. A subsequent interview study with 29 commercializing consumer innovators provides clear support for the explanation that consumer innovators' different motivations to innovate are the reason for the observed differences in price setting.The second study investigates product adoption as a function of price moderated by the presence of a consumer innovation label. An analysis of 2,340 matched pairs of computer games, either commercialized as consumer innovation or not, shows that the source of innovation moderates the inverse U-shaped relationship between price and demand: buyers develop lower reference prices for consumer-developed products. Further, deviations from the reference price have less severe negative consequences on the demand for consumer innovations. Two randomized between-subject experiments with 229 panel participants corroborate the field study's results and validate the theoretical underpinnings.Both studies' findings are scaffolded by numerous robustness checks and auxiliary analyses, including a time-lag analysis and textual content analyses. The results contribute knowledge on the commercialization of consumer innovations by showing that consumer innovators set prices differently than firms and that customers evaluate their offers differently. Theoretical and practical implications of the findings are discussed and further research avenues identified. Table of Contents 1 INTRODUCTION 1.1 Research topic 1.2 Research objectives 1.3 Course of investigation 2 PRICE FUNCTIONS, PRICE SETTING AND PRICE PERCEPTIONS 2.1 Microeconomic market price dynamics 2.2 Price setting strategies and tactics 2.2.1 Cost-based pricing 2.2.2 Value-base...