A Model of General Equilibrium Pricing of Innovation with Effort Exerting Consumers

Even in competitive markets without IP protection, market failures can arise through misaligned incentives in the innovation-consumption process.

Decentralised equilibrium fails to achieve social optimum: When consumers control effort levels in accessing knowledge goods, competitive markets do not deliver socially efficient outcomes

Excess appropriability by firms causes inefficiency: Consumers have no incentive to exert optimal effort since firms capture all benefits from improved copying rates

Innovation returns remain positive: Despite market failure, the return on innovation (q₀) stays bounded away from zero even with infinite copying rates

Consumer effort crucial for copying technology: The degraded copying rate g(eₜ) depends on consumer effort, creating tension between firm profits and social efficiency

Extension of Boldrin-Levine framework: Builds on competitive innovation model but introduces consumer effort as determinant of copying rates

Two-period general equilibrium model: Consumers maximise utility from consumption minus disutility of effort, firms maximise present value of profits

Effort-dependent copying technology: Knowledge goods allocated to consumption reproduce at rate g(eₜ) rather than fixed degraded rate γ̂

No intellectual property rights: Competitive market structure with unrestricted copying and entry

Kuhn-Tucker optimisation: Formal proofs using Lagrangian methods to characterise social optimum versus competitive equilibrium

IP policy reconsideration: Market failures can occur even without traditional appropriability problems, suggesting nuanced approach to intellectual property design

Consumer incentive alignment: Firms may need to develop mechanisms to reward consumer effort that improves reproduction technology

Platform design: Digital platforms should consider how user engagement affects content reproduction and viral spread

Innovation ecosystem: Optimal innovation requires coordination between producers and consumers, not just removal of IP barriers

Theoretical foundations: Challenges universal applicability of Boldrin-Levine results by showing sensitivity to consumer behaviour assumptions