WELFARE IMPLICATIONSOF USER INNOVATION

The literature on new goods and social welfare generally assumes thatmanufacturers develop innovations. But innovation by users has been foundto also be an important part of innovative activity in the economy. In this Paperwe explore the impact of users as a source of innovation on product diversity,innovation, and welfare. We examine the impact of user innovation oninefficiencies that bias the provision of new goods, and find that most areeither alleviated or non-existent for user innovation. There are three majorreasons for this. First, user innovations tend to complement manufacturerinnovations, filling small niches of high need left open by commercial sellers.Second, user innovation helps to reduce information asymmetries betweenmanufacturers and users. Third, user innovations are more likely to be freelyrevealed than manufacturer innovations. We conclude that, compared to acounterfactual world without such innovation, social welfare is most likely to beincreased by the presence of user innovation. We derive implications forpolicy-makers and managers....