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Economics of Innovation
Welfare gains from product innovation
Manuel Trajtenberg2005
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Reminder: social benefits from Reminder: social benefits from processprocess innovation innovation
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Griliches: social returns from hybrid corn – 700%
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Product InnovationProduct Innovation
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But what if product differentiation, choose just one?
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The frameworkThe “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) :
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The MNL and the surplus function
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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.
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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.
Computed Tomography (CT) Scanners
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First Generation CT Scanners
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Second Generation CT Scanners
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Third Generation CT Scanners
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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.
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Diffusion of CT Scanners by Hospital Size
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CT Scanners: Market Indicators
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Firms in CT
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Prices and characteristics of CT Scanners
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CT Scanners: sales, firms, and R&D (R&D: for US firms only, in constant 1982 millions $)
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Reminder: the framework
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Estimating the Nested MNL
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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”.
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Estimates for Head Scanners
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How to compute W
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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
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Annual incremental gains (W) to representative user
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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?
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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)
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Computing total gains
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Total Gains and R&D
Social rate of return: 270%
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