The impact of market size and users’ sophistication on innovation: the patterns of demand

Abstract

The aim of this paper is an investigation on the role of demand upon innovation. Despite the decades-long debate on demand and innovation, theory still lacks an analytical formulation. This paper proposes a model where demand is conceived as a peculiar blend of two conditions, market size, and users’ sophistication. These conditions drive firms’ incentives to innovate. As the main outcome, the paper explores the underlying mechanisms of demand-pull theories and proposes a theoretical taxonomy of industries.

Keywords:

• innovation
• demand

JEL Classification :

• O31
• O33
• L15

Acknowledgements

I am really grateful to Ed Steinmueller for early inspiration and to Lorenzo Zirulia for his invaluable modeling skills. I would like also to thank Nicoletta Corrocher, Uwe Cantner, and Franco Malerba. Finally, scientific and moral support by Franco Donzelli has been priceless.