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Advanced Purchasing, Spillovers, Innovative Pricing and Serendipitous Discovery

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  • Eliasson, Gunnar

    () (Ratio)

Abstract

Advanced products such as aircraft distinguish themselves by a number of characteristics. Products are complicated and produced under very complicated circumstances, but also have a very long life. The purchase price, therefore, is a small part of total user cost of the product. Product value, hence, increases the more of cost efficient maintenance that has been built into the product and the easier it is to service and modernize. Advanced products also distinguish themselves by featuring the additional collective characteristic of a “cloud of technology spillovers” available to external users in proportion to their competence to commercialize them. While the value of that cloud to society may be greater than that of the product itself the value to the user may be much smaller. The producer, therefore, faces a tricky pricing problem and the value he can capture depends on his ability to charge for the dual product. I discuss joint production of products with rich spillovers in the context of joint customership, i.e. public purchasing of both products and the collective value generated by spillovers. I demonstrate that a win-win situation might exist between the two that improves with the commercial ability of the local economy to capture the value of the spillovers. Industrial participation programs can be made part of a sale to support the receiver competence of local producers to capture the spillover rents. Part of marketing the product, therefore, involves the ability to present a credible case for the economic value to society of the spillovers and to design a method of charging for them (Innovative pricing). A well designed, mutually beneficial contract should make both parties to the trade winners. This latter form of innovative pricing should be particularly attractive for developing countries. The theoretical argument is illustrated with the case of downstream industrial business formation around Swedish Aircraft industry.

Suggested Citation

  • Eliasson, Gunnar, 2008. "Advanced Purchasing, Spillovers, Innovative Pricing and Serendipitous Discovery," Ratio Working Papers 119, The Ratio Institute.
  • Handle: RePEc:hhs:ratioi:0119
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    File URL: http://www.ratio.se/pdf/wp/ge_spillovers.pdf
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    Keywords

    integrated production; competence blocs; joint customership; receiver competence; spillovers; organizational learning; technology diffusion;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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