Marketing Innovation

Marketing Innovation

Yongmin Chen

¤

Department of Economics, University of Colorado at Boulder, Boulder, CO 80309 Email: yongmin.chen@colorado.edu; Phone: (303)492-8736 June 2003; First Draft

Abstract: This paper provides an economic analysis of marketing innovation, the development

of new marketing tools and methods, focusing on two of its commonly observed forms: one that allows a …rm to acquire consumer information (target consumers) more e¤ectively, and another that reduces consumer transaction cost. Similar to that for a product or process innovation, a …rm’s incentive for marketing innovation depends on an immediate invention e¤ect and a delayed (negative) imitation e¤ect. However, for marketing innovation the (undiscounted) sum of these two e¤ects tends to be negative. The value of marketing innovation is positive if the invention e¤ect is positive and there is a su¢cient delay before imitation. A …rm’s incentive for marketing innovation also depends on market structure and the nature of competition. Within a duopoly market structure, increased competition intensity reduces the value of the innovation in information technology but may increase the value of the innovation in transaction cost reduction. Holding constant the nature of competition and allowing multiple …rms, a more concentrated market or a larger …rm has higher innovative incentive when imitation is di¢cult, and otherwise the opposite is true. Relative to the social optimum, the private incentive for the innovation to acquire consumer information is too high while that to reduce consumer transaction cost is too low.

JEL Classi…cation Number: L1, M3

¤I

acknowledge the …nancial support of a Faculty Fellowship from the Council on Research

and Creative Work at the University of Colorado at Boulder.

1

1. Introduction In a market economy, in addition to innovations in products and production processes, there are also innovations in the marketing of products. The...