Market failure in the diffusion of consumer-developed innovations: Patterns in Finland

Jeroen P.J De Jong,Eric Von Hippel,Fred Gault,Jari Kuusisto,Christina Raasch

doi:10.1016/j.respol.2015.06.015

Abstract

Empirical studies have shown that millions of individual users develop new products and services to serve their own needs. The economic impact of this phenomenon increases if and as adopters in addition to the initial innovators also gain benefits from those user-developed innovations. It has been argued that the diffusion of user-developed innovations is negatively affected by a new type of market failure: value that others may gain from a user-developed product can often be an externality to consumer-developers. As a result, consumer innovators may not invest in supporting diffusion to the extent that would be socially optimal. In this paper, we utilize a broad sample of consumers in Finland to explore the extent to which innovations developed by individual users are deemed of potential value to others, and the extent to which they diffuse as a function of perceived general value. Our empirical analysis supports the hypothesis that a market failure is affecting the diffusion of user innovations developed by consumers for their own use. Implications and possible remedies are discussed.

Highlights

Introduction and overviewEmpirical research finds that tens of millions of citizens spend tens of billions of dollars annually developing and modifying consumer products to better serve their own needs (von Hippel et al, 2011)
The social welfare benefits of single and collaborative user innovation by citizens will be considerably enhanced if citizendeveloped innovations of general value diffuse to others who can benefit from them
We have extensively analyzed the relationship between the perceived general value of user innovations, the extent to which they diffuse, and the extent to which effort is exerted by user innovators to support diffusion

Summary

Introduction

Introduction and overviewEmpirical research finds that tens of millions of citizens spend tens of billions of dollars annually developing and modifying consumer products to better serve their own needs (von Hippel et al, 2011). The social welfare benefits of single and collaborative user innovation by citizens will be considerably enhanced if citizendeveloped innovations of general value diffuse to others who can benefit from them. In the specific circumstances focused upon here, we say that a market failure exists if user innovators and adopters, taken together, would have higher net benefits from the user innovation if the user innovator invested more in diffusion. This type of market failure is novel in the innovation literature

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Results

Conclusion