Welfare Implications of User Innovation

The impact of user innovation on social welfare isanalyzed by comparing user innovators to manufacturer innovators in terms oftheir innovation incentives and knowledge.Following a review of theliterature on product development by users, it is argued that the introductionof user innovation in a marketplace can offset the tendency of manufacturers tounder-provide product diversity and can reduce inefficiencies created byinformation asymmetries. If manufacturers anticipate that users will develop innovations that theycan learn from, manufacturer incentives to innovate, as well as social welfare,are likely to grow; on the other hand, if manufacturers anticipate that userswill use information spillovers from a manufacturer innovation to createsubstitutes, social welfare and manufacturers' innovation incentives are likelyto diminish.Although there are clearly both positive and negative effectsfrom spillovers of innovation-related information between user and manufacturerinnovators, an innovation system that includes user innovation is moreconducive to social welfare than a system that features only manufacturerinnovation.(SAA)