Exploitative Innovation

Paul Heidhues, Botond Koszegi and Takeshi Murooka

Munich Reprints in Economics from University of Munich, Department of Economics

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.

Date: 2016
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Citations: View citations in EconPapers (19)

Published in American Economic Journal: Microeconomics 1 8(2016): pp. 1-23

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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:43464

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