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Exploitative Innovation

Author

Listed:
  • Heidhues, Paul
  • Kőszegi, Botond
  • Murooka, Takeshi

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.

Suggested Citation

  • Heidhues, Paul & Kőszegi, Botond & Murooka, Takeshi, 2016. "Exploitative Innovation," Munich Reprints in Economics 43464, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:43464
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    References listed on IDEAS

    as
    1. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
    2. Victor Stango & Jonathan Zinman, 2014. "Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 990-1030.
    3. Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
    4. Paul Heidhues & Botond K?szegi & Takeshi Murooka, 2016. "Exploitative Innovation," American Economic Journal: Microeconomics, American Economic Association, vol. 8(1), pages 1-23, February.
    5. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    6. repec:oup:restud:v:84:y::i:1:p:323-356. is not listed on IDEAS
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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