Diffusion Shortfall in Free Innovation (Chapter 5)
In this chapter, I document and discuss an important difference between the free innovation paradigm and the producer innovation paradigm with respect to innovation diffusion. The difference springs from the fact that, unlike producers, free innovators do not protect their innovations from free adoption, and they do not sell them. As a result, benefits that free-riding adopters may gain are not systematically shared with free innovators—there is no market link between these parties. For this reason, free innovators may often have too little incentive, from the perspective of social welfare, to invest in actively diffusing their free innovations. In contrast, of course, producers do have a direct market link to consumers, so there should be no similar diffusion incentive shortfall within the producer innovation paradigm.
I review an initial empirical study that finds evidence compatible with diffusion incentive and diffusion investment shortfalls by free innovators (de Jong, von Hippel, Gault, Kuusisto, and Raasch 2015). I then suggest how to address a free innovation diffusion shortfall without resorting to the introduction of markets.