Market failure type 2: Suboptimal investment in design

Even if free innovators create a design of potential use to others, they may have no incentive to invest in improving the design to a level commensurate with potential value to themselves and free-riding adopters. For example, if fairly buggy code or roughly designed hardware will suit my personal needs, I may have no incentive to invest in refining my design, even if one thousand free riding adopters would benefit from my doing so. Free innovators will follow the viability calculations shown in chapter 3: They will invest in design only to the point that is optimal for themselves in the light of their particular constellation of self-rewards. Of course, when multiple free innovators collaborate on a project, design investment for the total project is likely to be higher than in single-developer projects.

Market failure type 3: Low diffusion effort by free innovators

The third possible manifestation of diffusion market failure is suboptimal investments to promote diffusion of a free innovation to free riders who might benefit from it. In table 5.3 we see evidence compatible with this third type of market failure in the case of innovations developed by individuals in Finland (de Jong, von Hippel, Gault, Kuusisto, and Raasch 2015). In the data columns of that table we see that more than 75 percent of free innovators invested no effort in diffusion, even in the case of the Cluster 1 innovation designs that the developers thought had high general value. (Free innovators' self-assessments of general value may be right or wrong, but their efforts to diffuse for the benefit of others—the matter of interest here—will be a function of their own beliefs, not of the actual general value of their innovations.) Indeed, efforts to diffuse were so minimal that my colleagues and I had to use a very low threshold for our definition of active diffusion effort. Effort to diffuse an innovation peer-to-peer was deemed to exist if an innovator had simply shown the design to one or more peers. Effort to diffuse an innovation to a commercial firm was deemed to exist if an innovator had taken the initiative to show it to one or more commercial firms.

In addition to the finding of very low levels of diffusion effort in general, my colleagues and I found that in the case of peer-to-peer diffusion effort there is no significant relationship between diffusion effort exerted and the general value of the innovation (%2 = 2.5, df = 2, p = .285). That is precisely what we would expect to see if there is a market failure of the type I am discussing here. Note that the pattern we see includes some free innovators making an effort to show innovations to peers that they themselves think have no general value (12 percent of cluster 3 in table 5.3). This can result if the free innovators have reasons to show their innovations for reasons not associated with

Table 5.3

Diffusion effort across clusters of general value in Finland.

Perceived general value

Diffusion effort made by free innovators

to inform peers

to inform producers

Cluster I: valuable to many

23%

19%

Cluster II: valuable to some

21%

6%

Cluster III: valuable to none

12%

0%

Source: de Jong, von Hippel, Gault, Kuusisto, and Raasch 2015, table 6.

general value. For example, they may wish to show a "cool project” to friends independent of whether they think those individuals would find it useful.

In contrast, free innovators' efforts to diffuse information about their innovations to producers were significantly related to their assessment of the general value of the innovations: The more generally valuable the developer thought an innovation was, the higher the likelihood that that individual would make an effort to inform producers about it (x2 = 12.2, df = 2, p = .002). Of course, it is entirely reasonable that innovators will make an effort to inform producers only if they think the producer might find the innovation commercially interesting. After all, if there is no commercial value in the innovation, efforts to bring it to the attention of producers would be wasted. Still, despite this pattern, the fact that free innovators only informed producers about 19 percent of innovations they thought had the highest value to others (Cluster 1 in table 5.3) again suggests a market failure exists in the free innovation paradigm with respect to incentives to invest in diffusing free innovations to adopters.

 
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