Bringing Back Production Costs and Transaction Costs

Recall that at the beginning of this chapter, in order to focus on the contrasting effects of design and communication costs on the three modes of innovation, we made the simplifying assumption that production costs and transaction costs were similar across all three modes, and so had no effect on any mode's viability relative to the other two. I now bring these two costs back into consideration and discuss whether there are systematic differences in production or transaction costs across the three modes. In effect, we now will include all four cost variables—design costs di, communication costs ci, production costs ui, and transaction costs t—in our assessment of the viability of innovation opportunities:

This discussion will show that production cost considerations may favor producers over free innovators in many cases today, but that production cost considerations are trending toward neutrality over time. Transaction cost considerations, on the other hand, favor free innovators over producers.

 
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