Division of Labor between Free Innovators and Producers

In this chapter, I explain the value of a division of innovative labor between free innovators and producer innovators. As Gambardella, Raasch, and von Hippel (2016) show, both social welfare and producer profits very generally increase if producers avoid developing types of innovations that free innovators already make available "for free.” Instead, as my colleagues and I argue, producers should learn to focus on developing innovations that complement free innovation designs rather than substitute for them. Further, innovation tasks can and should increasingly be shifted to free innovators as their capabilities increase—that is, they should be shifted to what standard economic models think of as the demand side of markets.

I will begin by reviewing four basic interactions between the free and producer innovation paradigms. Then I will explain how my colleagues and I modeled the relationships among these interactions, and the effects that we found on both producers' profits and social welfare. As we will see, under some conditions producers can profit by actually subsidizing free innovation.

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