The Monetization of Innovation

Missaka Warusawitharana and Francesca Zucchi

No 21924, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a dynamic model for digital service firms, which invest in monetization to generate revenues from services that customers may not fully pay for. A key novelty of our model is that customer acquisition by firms need not translate directly into the generation of revenues. Our model explains why such firms often build a large customer base and become highly valued while continuing to suffer losses, fueled by substantial upfront SG&A expenditures with sizable though risky growth potential. Counterfactual analysis reveals that hurdles to monetization — such as regulation aimed at protecting customer privacy — make firms smaller and less innovative, whereas direct revenues from customers support technological advancement.

Keywords: Monetization; Innovation; Digital service firms (search for similar items in EconPapers)
JEL-codes: D21 G31 O31 O32 (search for similar items in EconPapers)
Date: 2026-09
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