Exploitative Innovation
- (pp. 1-23)
(Complimentary)
Abstract
We analyze innovation incentives when firms can invest either in increasing the product's value (value-increasing innovation) or in increasing the hidden prices they collect from naive consumers (exploitative innovation). We show that if firms cannot return all profits from hidden prices by lowering transparent prices, innovation incentives are often stronger for exploitative than for value-increasing innovations, and are strong even for non-appropriable innovations. These results help explain why firms in the financial industry (e.g., credit-card issuers) have been willing to make innovations others could easily copy, and why these innovations often seem to have included exploitative features. (JEL D21, G21, L11, L25, O31)Citation
Heidhues, Paul, Botond Kőszegi, and Takeshi Murooka. 2016. "Exploitative Innovation." American Economic Journal: Microeconomics, 8 (1): 1-23. DOI: 10.1257/mic.20140138Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- L25 Firm Performance: Size, Diversification, and Scope
- O31 Innovation and Invention: Processes and Incentives
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