The User Innovation Paradigm: Impacts on Markets and Welfare

Abstract

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.

Introducing the dilemma of societal alignment for inclusive and responsible research and innovation

“…The untapped potential of some forms of grassroots innovation, and resulting limited diffusion of valuable innovations, reflects a division of labour between consumer innovators, private companies and public organisations in innovation activities (Gambardella, Raasch, and von Hippel 2017). In this context, systems of innovation frameworks (Bengtsson and Edquist 2017;Edquist 2011) can be helpful for exploring policy alternatives.…”

Lead User Method vs. Innovation Contest An Empirical Comparison of Two Open Innovation Methodologies for Identifying Social Innovation for Flood Resilience in Indonesia

“…In the past few decades, this view has been challenged, since there is increasing evidence that the locus of innovation may also be outside a company's boundaries: with users (Gambardella et al 2016). While manufacturers seek to benefit from selling a product or service, users develop innovations on their own and benefit from using them (von Hippel 2009).…”

Supply Chain Contracts in the Presence of Gray Markets

“…SW function is defined as the sum of total supply chain profit, and the CS, that is, SW = c sc + CS (Benjaafar, Kong, & Courcoubetis, 2018). CS is the sum of consumers' utility received from buying from the authorized channel and the GM, and is calculated as follows (Cho, Qiu, & Bandyopadhyay, 2016;Gambardella, Raasch, & von Hippel, 2016;Hassin, & Roet-Green, 2017):…”