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Economics of Innovation Welfare gains from product innovation Manuel Trajtenberg 2005

Economics of Innovation Welfare gains from product innovation Manuel Trajtenberg 2005. Reminder: social benefits from process innovation. P. P 0. MC 0. P 1. MC 1. D. X. X 0. X 1. Griliches: social returns from hybrid corn – 700%. Product Innovation. P. P. P 1. P 0. MC. P 0.

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Economics of Innovation Welfare gains from product innovation Manuel Trajtenberg 2005

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  1. Economics of InnovationWelfare gains from product innovationManuel Trajtenberg2005

  2. Reminder: social benefits from process innovation P P0 MC0 P1 MC1 D X X0 X1 Griliches: social returns from hybrid corn – 700%

  3. Product Innovation P P P1 P0 MC P0 D1 D1 D0 D0 X1 X0 X1 X0 X X But what if product differentiation, choose just one?

  4. The framework The “magnitude” of product innovation between two periods: the increment in consumer surplus associated with having the latest choice set (St) rather the previous one (St-1) : If just one product x and one quality dimension z, i.e. additional area under demand function, brought about by z.

  5. The MNL and the surplus function The surplus function (exponent: for linear utility):

  6. Estimation - Endogeneity Estimate MNL for differentiated products in the market. Issues: IIA, and: Serious problem: endogeneity of price, i.e. price (positively) correlated with unobserved quality (which goes into the error term), hence upward bias in estimation of – critical (see surplus function)! In study of CT Scanners, finding of upward slopping demand curve, for that reason; correction using residuals from hedonic price function. But later on whole literature on how to cope with the problem – BLP etc.

  7. Computed Tomography (CT) Scanners Key issue in Medicine: ability to visualize internal organs. X-rays (~1900), ultrasound (1950s), gamma camera (1960s). All of these: rather crude. Otherwise: cut open! Hounsfield began work on CT at EMI, in 1967. First installation: 1973. First only head, then also body scanners. Godfrey Hounsfield and Allan M. Cormack (Tufts University) got the Nobel Prize in Medicine in 1979. Since then: MRI, fMRI, PET, angio CT, etc.

  8. First Generation CT Scanners

  9. Second Generation CT Scanners

  10. Third Generation CT Scanners

  11. Performance Characteristics of CT Scanners • CT Scanners: highly complex systems, yet main attributes: • Scan time: how long it takes to scan one thin cross-sectional “slice” (minutes at first, down to 1 sec) • Spatial Resolution – size of smallest object that can be just visualized in best of conditions (but there is more to image quality). • Reconstruction time: from end of scan to image display.

  12. Diffusion of CT Scanners by Hospital Size

  13. CT Scanners: Market Indicators

  14. Firms in CT

  15. Prices and characteristics of CT Scanners

  16. CT Scanners: sales, firms, and R&D (R&D: for US firms only, in constant 1982 millions $)

  17. Reminder: the framework

  18. Estimating the Nested MNL Estimate two clusters, one for Head (H) the other for Body (B) scanners, If  = 1 then back to the MNL, if  = 0 then separate “markets”.

  19. Estimates for Head Scanners

  20. How to compute W Given changes in tastes over time, two ways to compute the welfare gains from year to year: “Dual inducement” mechanism, hence in practice found ex-ante > ex-post

  21. Annual incremental gains (W) to representative user

  22. How to compute “total gains” from product innovation? One angle of the issue: Consumer buying PC today: should we take into account only the latest innovations? Or should we say that he/she is benefiting from the long sequence of innovations since say the first computers (the ENIAC) on? Or perhaps just since the first Apple? Another angle: Should we just multiply Wt times to number of buyers at t? Or perhaps times the number of projected buyers from t on?

  23. How to compute “total gains” – cont. Estimate diffusion as a function of e.g. Wt that is, innovation moves up the ceiling, bringing in new consumers. Assign to these additional consumers the benefits Wt . (but discount them back to t)

  24. Computing total gains

  25. Total Gains and R&D Social rate of return: 270%

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