Discussion

We now have a strong logical case and initial empirical support for the view that free innovators' investments in diffusion may generally fall short of the social optimum. As has been discussed, in the case of free innovation, this effect is due to a market failure "built into” the free innovation paradigm—the absence of a market connection between free innovators and free adopters (de Jong, von Hippel, Gault, Kuusisto, and Raasch 2015; von Hippel, DeMonaco, and de Jong 2016).

In this discussion I first note that the free innovation paradigm is not uniquely defective in this regard. There is a diffusion shortfall built into both the free innovation and producer innovation paradigms—but different adopter types are affected. Next I briefly consider three possible approaches to easing the diffusion incentive shortfall in the free innovation paradigm: a market solution, non-market solutions, and possible government policy solutions.

Exclusion of unskilled adopters

Diffusion shortfalls afflict both the free innovation paradigm and the producer innovation paradigm, but the causes are different. In the case of the free innovation paradigm, as we have seen, adoption costs are higher than the social optimum due to free innovators' "too-low" incentives to invest in diffusing them. In the case of the producer innovation paradigm, a diffusion shortfall results from producers' pricing above the marginal cost of production.

Consider that intellectual property rights enable producers to charge monopoly prices. (These rights are available to both free innovators and producer innovators, but only producers have a reason to want them: free innovators, giving their innovations away, have no interest in monopoly pricing.) Although monopoly pricing can increase producers' incentives to create innovations, they also create what is called "deadweight loss" with respect to the diffusion of innovations after they have been created. That is, monopoly prices exclude customers who would purchase the innovation and benefit from it if it were priced at the marginal cost of production, but who will not buy it at the higher prices set by the producer.

An interesting contrast can be made between the characteristics of the potential adopters denied access by these two different forms of adoption barriers. Those deterred from adopting a free innovation due to free innovators' inadequate investment in diffusion will tend to be relatively deficient in technical skills. In contrast, those deterred from adopting producer innovations by monopoly prices will tend to be those with less money. This pattern has not yet been studied, but my colleagues and I think it is both logical and clearly visible in everyday life. For example, people with technical skills do not need money to go to free Internet sites to "jailbreak" their smartphones and escape phone producers' restrictions. They can then download and use the latest free features. Millions in fact do this (Greenberg 2013). In contrast, people with money, and perhaps no technical skills, are more likely to pay phone producers' monopoly prices to buy the latest products equipped with the newest commercial features.

 
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