A Model of General Equilibrium Pricing of Innovation with Effort Exerting Consumers
Extends the Boldrin-Levine framework for competitive innovation by introducing consumer effort as a determinant of copying rates for knowledge goods. Challenges the standard result that competitive markets achieve socially optimal innovation levels when consumers have discretionary control over effort in accessing innovative products. Demonstrates that excess appropriability by firms leads to market failure, as consumers lack incentives to exert optimal effort levels that would improve copying rates. Maintains that innovation returns remain positive even with infinite copying rates, but shows the competitive equilibrium fails to deliver the social optimum when consumer behaviour affects reproduction technology.
Key Findings
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
General equilibrium innovation model with consumer effort and copying.
Methodology
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
Implications
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