Division of Labor between Free Innovators and Producers (Chapter 6)

To this point in the book, we have seen that the free and producer paradigms systematically differ with respect to the innovators' incentives, activities, and outputs. Recall that the paradigms also interact. In chapter 6, I describe their major interactions and the effects of these in detail. Drawing upon modeling by Gambardella, Raasch, and von Hip- pel (2016), I explain that there is an opportunity for a division of innovation labor between free innovators and producer innovators that simultaneously enhances social welfare and producers' profits. Producers, my colleagues and I argue, will benefit by not investing in R&D that substitutes for innovations that free innovators develop. Instead, producers will—often but not always—benefit from investing in supporting free innovator design activities. Producers should then focus their own resources on development activities that free innovators do not engage in, such as refinements needed for commercialization. Social welfare, we find, will benefit from public policies that encourage producers to transition from a focus on in-house development to a division of innovation labor with free innovators.

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