Section 3: Innovation diffusion, intellectual property, and information trading

My own work in this area began with studies of how firm employees traded valuable proprietary information. A wonderful paper by Robert Allen really was the start of systematic thinking about the benefits that might flow from something much more radical – intentional open revealing of
intellectual property developed at private cost (Allen, R. C. (1983). “Collective Invention.” Journal of Economic Behavior and Organization 4(1): 1-24.) Spurred on by his work and the evident success of open source software, quite a few of us then began trying to understand the economic benefits of open vs. proprietary information.

The latest work in this area is based on the idea that, while user innovators may freely reveal the innovations, they do not necessarily have an incentive to invest in active efforts to diffuse those innovations – because the benefits that others may obtain from actually adopting their innovations can be an externality for user innovators.  This is an important market failure – and is now being investigated (see the paper with Harry Demonaco at the end of this section for first theory and empirical work on that topic)

von Hippel, Eric. “Cooperation Between Rivals: Informal Know-how Trading.” Research Policy 16, no. 6 (December 1987): 291–302. doi:10.1016/0048-7333(87)90015-1. (PDF)

Abstract: “Informal” know-how trading is the extensive exchange of proprietary know-how by informal networks of process engineers in rival (and non-rival) firms. I have observed such know-how trading networks to be very active in the US steel minimill industry and elsewhere, and they appear to represent a novel form of cooperative R&D.
When one examines informal know-how trading in the framework of a “Prisoner’s Dilemma”, real-world conditions can be specified where this behavior both does and does not make economic sense from the point of view of participating firms. Data available to date on the presence and absence of such trading seem to be roughly in accordance with the predictions of this simple model.
Although presently documented only as a firm-level phenomenon involving the trading of proprietary technical knowhow, informal know-how trading seems relevant to (and may currently exist in) many other types of situation. Indeed, it may be applicable to any situation in which individuals or organizations are involved in a competition where possession of proprietary know-how represents a form of competitive advantage.

von Hippel, Eric, and Stephan Schrader. “‘Managed’ Informal Information Trading: The Oil Scout System in Oil Exploration Firms.” International Journal of Technology Management 11 (1996): 207–218.

Harhoff, Dietmar, Joachim Henkel, and Eric von Hippel. “Profiting from Voluntary Information Spillovers: How Users Benefit by Freely Revealing Their Innovations.” Research Policy 32, no. 10 (December 2003): 1753–1769. doi:10.1016/S0048-7333(03)00061-1. (PDF)

Abstract: Empirical studies of innovation have found that end users frequently develop important product and process innovations. Defying conventional wisdom on the negative effects of uncompensated spillovers, innovative users also often openly reveal their innovations to competing users and to manufacturers. Rival users are thus in a position to reproduce the innovation in-house and benefit from using it, and manufacturers are in a position to refine the innovation and sell it to all users, including competitors of the user revealing its innovation. In this paper, we explore the incentives that users might have to freely reveal their proprietary innovations. We then develop a game-theoretic model to explore the effect of these incentives on users’ decisions to reveal or hide their proprietary information. We find that, under realistic parameter constellations, free revealing pays. We conclude by discussing some implications of our findings.

von Hippel, Eric, and Georg von Krogh. “Open Source Software and the ‘Private-collective’ Innovation Model: Issues for Organization Science.” Organization Science 14, no. 2 (March 2003): 209–223. (PDF)

Abstract: Currently, two models of innovation are prevalent in organization science. The ‘private investment’ model assumes returns to the innovator result from private goods and efficient regimes of intellectual property protection. The ‘collective action’ model assumes that under conditions of market failure, innovators collaborate in order to produce a public good. The phenomenon of open source software development shows that users program to solve their own as well as shared technical problems, and freely reveal their innovations without appropriating private returns from selling the software. In this paper, we propose that open source software development is an exemplar of compound ‘private-collective’ model of innovation that contains elements of both the private investment and the collective action models and can offer society the ‘best of both worlds’ under many conditions. We describe a new set of research questions this model raises for scholars in organization science. We offer some details regarding the types of data available for open source projects in order to ease access for researchers who are unfamiliar with these, and also offer some advice on conducting empirical studies on open source software development processes.

Lakhani, Karim R., and Eric von Hippel. “How Open Source Software Works: ‘Free’ User-to-user Assistance.” Research Policy 32, no. 6 (June 2003): 923–943. doi:10.1016/S0048-7333(02)00095-1. (PDF)

Abstract: Research into free and open source software development projects has so far largely focused on how the major tasks of software development are organized and motivated. But a complete project requires the execution of “mundane but necessary” tasks as well. In this paper, we explore how the mundane but necessary task of field support is organized in the case of Apache web server software, and why some project participants are motivated to provide this service gratis to others. We find that the Apache field support system functions effectively. We also find that, when we partition the help system into its component tasks, 98% of the effort expended by information providers in fact returns direct learning benefits to those providers. This finding considerably reduces the puzzle of why information providers are willing to perform this task “for free.” Implications are discussed.

Henkel, Joachim, and Eric von Hippel. “Welfare Implications of User Innovation.” The Journal of Technology Transfer 30, no. 1 (December 1, 2004): 73–87. doi:10.1007/s10961-004-4359-6. (PDF)

Abstract: Innovation by users is now understood to be an important part of innovative activity in the economy. In this paper we explore the implications of adding innovation by users to existing models of social welfare that currently assume innovation by manufacturers only. We find this addition removes several inefficiencies, and that social welfare is likely to be increased by the presence of user innovation. Implications for policies that can impact users” freedom to innovate are discussed.

Fauchart, Emmanuelle, and Eric von Hippel. “Norms-based Intellectual Property Systems: The Case of French Chefs.” Organization Science 19, no. 2 (March 2008): 187–201. doi:10.1287/orsc.1070.0314. (PDF)

Abstract: In this paper we propose that norms-based intellectual property (IP) systems exist today and are an important complement to or substitute for law-based IP systems. Norms-based IP systems, as we define them, operate entirely on the basis of implicit social norms that are held in common by members of a given community. Within that community, they offer functionality similar to contemporary law-based IP systems with respect to both the nature of rights protected and the effectiveness of the protection provided. We document the existence of a norms-based IP system among a sample of accomplished French chefs. These chefs consider recipes they develop to be a very valuable form of IP. At the same time, recipes are not a form of innovation that is effectively covered by law-based IP systems. Via grounded research, we identify three strong implicit social norms related to the protection of recipe IP. Via quantitative research, we find that accomplished chefs enforce these norms and apply them in ways that enhance their private economic returns from their recipe-related IP. In our discussion, we compare the attributes of norms-based and law-based IP systems, arguing that each has different advantages and drawbacks. We also point out that the existence of norms-based IP systems means that many information commons may prove to be criss-crossed by norms-based fences, with community access controlled by community IP owners.

von Hippel, Eric, Harold Demonaco, and Jeroen de Jong (2016) “Market failure in the diffusion of clinician-developed innovations: The case of off-label drug discoveries”  Science and Public Policy, doi: 10.1093/scipol/scw042


User innovators develop innovations in order to use them.  For this reason, the benefits that others might obtain from adopting user innovations will be at least partially an externality for innovating users.  This circumstance creates the possibility of a market failure.  An innovators’ investment in diffusion can lower adoption costs for many.  However, as user innovators may have no or “too low” incentives to invest for this purpose, diffusion of user innovations may be not optimal from a social welfare perspective.

In this paper, we conduct a first empirical exploration of the possible under-diffusion of user-developed innovations due to inadequate incentives.  Specifically, we survey medical clinician’s incentives to diffuse information regarding novel “off-label” applications for approved drugs and medical devices that they developed for use in their own medical practices.  We find that there is indeed a mismatch between the costs the clinicians must incur to widely diffuse their innovations and their incentives to do so – resulting in under-diffusion of this type of innovation from the social welfare perspective.  We consider how this problem of under-diffusion could be addressed by reductions in user-innovator’s diffusion costs and/or increases in their benefits from diffusion.