Lecture 3 in-class notes

Role of Market Size on Product Variety (Schmookler 1966)

Greater market size => greater variety of potential solutions and R&D efforts go into making multiple varieties of the product.

Condition: demand must be heterogeneous. If homogeneous, there will be only 1 winning product suitable for all consumers.

Role of size of demand (Jacob Schmooklet 1966)

Bi-directional effect between demand and innovation:

• demand may pull innovation

• innovate may generate new demand

Induced Innovation (Hicks 1932)

Changes in relative factor prices spur inventions (to economize the use of expensive factors)

Example: If labor is expensive = more incentive to produce innovations that’ll enable sales.

Technology Push

Innovation starts with a discovery/invention. Linear process

Demand pull

Innovation starts with a market need. No demand = no innovations.

Main criticims of demand pull approach (2)

Mowery & Rosenburg (1979) and Dosi (1982):

1. Does not distinguish amont potentially limitless set of human needs

   1. Since human needs are limitless, it would be untrue to say that NO needs were satisfied because a tech was developed

2. Does not explain why & when certain techs are developed rather than others

Examples of Technology Push

X-Rays, the internet, the airplane & mainframe computers

Examples of Demand Pull

digital X-Rays, cat scanners, pcs & and smartphones

Demand as a source of innovation

Users as Innovators (Myers and Marquis 1969)

Users play a significant role in innovation, with demand factors being relevant for 75% of successful innovations.

User-Producer Interactions (Lundvall 1992)

• Feedback important (technical feedback, not simple)

• Users have deep understanding of product

• Mutual learning, since users and producers both have specific knowledge.

Effects that Characterize a Lead User (2) (Von Hippel 1982, 1985, 2005)

Knowledge effect

• LUs experiment needs that the rest of users have not yet experienced.

Incentive effect

• If a supplier fixes the product, it benefits me since I’m the one using it

Industrial Users: Innovate or Buy?

• Manufacturers will be more focused on finding a compromise than finding the best solution

• Risk of opportunism

• Users not flexible regarding quality

• When a user buys, they expect services as well

• Principal-agent costs

  • Cost by the user to ensure that the manufacturer follows the interests of the principal.

Communities (Wellman et al. 2002)

“networks of interpersonal ties that provide sociability, support, information, a sense of belongingness and social identity”

Innovation communities (Von Hippel 2005)

“nodes consisting in individuals or firms interconnected by information transfer links that involves communication”

Co-invention

Innovation by seller/manufacturer and complementary innovations by buyer (in terms of organization, services, applications, products, etc.)

Co-creation

Collaborative development between complementary partners, such as a manufacturer and a user, to create new products or services.

For horizontal technologies

Open Innovation (Chesbrough 2003)

Firms should use external knowledge to accelerate internal innovations, and combines external ideas with internal ones.

Challenge: convert ext knowledge into new products & services.

Trademarks (TM)

Protection of signs or symbols that are capable of distinguishing the goods or services of a company.

Not an indicator of innovation, because they do not require novelty

Types of entrepreneurship (2)

User entrepreneurship

• New firms founded by individuals who have innovative ideas.

User-industry spinouts

• New firms founded by ex-employees of user firms that enter the supplier industry.

Two ways of entre from industrial demand

Vertical integration: When a user firm innovates and produces a component internally instead.

User-industry spinout.

Determinants of rate of diffusion (4)

• Benefit received by the tech

• Network effects

• Cost of adopting new tech

• Information & uncertainty

• Demand size

• Market structure

• Industry environment

• Cultural + social factors