Marketing Innovation

This paper provides an economic analysis of marketing innovation. A dynamic duopoly model is developed to study two forms of marketing innovation: ; which allows a …rm to acquire consumer information e¤ectively; and ; which reduces consumer transaction costs. The incentives and e¤ects of marketing innovation di¤er markedly from those of product or process innovations. While bene…ts the innovating …rm, it hurts some consumers; and, while bene…ts all consumers, it may or may not bene…t the innovating …rm. Increased competition intensity reduces the value of but increases the value of : The private incentive is too high for but too low for . Kew Words: marketing innovation, consumer information, transaction costs JEL Classi…cation Number: L1, M3 I am indebted to a referee and a coeditor for their detailed and thoughtful comments that substantially improved the paper. I also thank Mark Armstrong, Gary Biglaiser, Joshua Gans, Brad Graham, Rune Stenbacka, participants of the Seminar on "Competition Strategies and Customer Relations" at the Helsinki Center of Economic Research, the 2004 Summer IO Workshop at Peking University, and seminar participants at Boston University, Michigan State University, University of Colorado at Boulder, and University of Colorado in Denver for helpful comments and discussions. Financial support of a Faculty Fellowship from the University of Colorado at Boulder is gratefully acknowledged.