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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 |
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