Does innovation always increase value?

An industrial robot, which writes down the bib...
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As an economic concept, innovation is related to improvement. It is a positive concept, we do not think about an innovation that drives to a worse situation. This assumption can be considered true if we always think about innovation joined to markets because of their dynamics.

We usually forget that many things that we are using every day (and pay) have not a real utility but others with a low market price give us a lot of utility. The perceived value of a product can be different for different users because it is related to the utility that produce to the user.

For example, what is the value of an internet connection? An internet connection can be valued at its market price, but its cost of opportunity can be lower or very much higher. A domestic user without internet probably could substitute his internet activity with phone calls, but the cost of disconnecting a company that only sells its products on-line could be unacceptable.

Easily, we can notice that price is different from utility. Price depends on offer and demand laws, and utility depends on the customer.

Innovation origin is not related to the price of the product, it can be related to the cost of the product (process innovation) or the functionality of the product (product innovation). The price of a product will be defined initially following a marketing strategy. The initial price will be defined according to the segment of market that we want to serve, and of course, it must cover the production cost and the amortization of the investment.

If we think about value as the price that customers would be willing to pay, value will depend on opportunity costs and the functionality of the product, and it will not be equal to the market price. Value could be different for different customers again.

The market price, in general, will be lower than the value, but product innovation will let to fix the market price nearer the value, especially, if we have got a patent of our technology, because of differentiation.

Industrial property increases value: A patent identifies a product with its technology, and a trademark identifies a product with its manufacturer (manufacturing process) and its quality. Thus, while it reduces the uncertainty about the product, it is increasing the quantity that the customer would be willing to pay.

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2 thoughts on “Does innovation always increase value?

  1. Innovation can have a positive short term increase in value however it may be negative in the long term especially if you consider all the outputs or effects. An example of this is the hybrid car – saves on fuel but what about disposing of the batteries. Nuclear power could also be considered in this way!

    1. All technologies have a life cicle, but we expect that innovation provides a new technology when the old technology enters a decreasing phase. It is the example that Terry has shown: When fuel cars are near the decreasing phase, innovation provides a better solution as the hybrid car.

      With nuclear power, we can think in the same way. It is a transit technology. Nowadays, we need it because provides value to us, but we continue searching for other ones.

      Technology cicle must be managed.

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