The Monetization of Innovation

Missaka Warusawitharana and Francesca Zucchi
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Francesca Zucchi: https://www.ecb.europa.eu/pub/research/authors/profiles/francesca-zucchi.mt.html

No 2022-084, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We develop a dynamic model for digital service firms, which invest in monetization to generate revenues from services provided to customers for free. Our model captures and explains why such firms often build a large customer base and become highly valued while continuing to suffer losses—traditional models would struggle to explain this pattern. Counterfactual analysis reveals that monetization uncertainty slows technological advancement by diverting resources away from innovation. We also show that regulation aimed at protecting user privacy has sizable adverse effect on firm size and the quality of the offered service but, perhaps surprisingly, makes firms less unprofitable. On the other hand, regulation encouraging competition supports innovation.

Keywords: monetization; data privacy; digital service firms; innovation; regulation (search for similar items in EconPapers)
JEL-codes: D21 G31 O31 O32 (search for similar items in EconPapers)
Pages: 61 p.
Date: 2022-12
New Economics Papers: this item is included in nep-com, nep-pay and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-84

DOI: 10.17016/FEDS.2022.084

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