Innovation Failure

Recently, I have been reading some examples of market failure and I was curious if they might be connected in some way. It seemed to me that they related to an idea I wrote about in this post on magic in the marketplace. Let me list some examples:

1. I wrote about the fact that all North Indian restaurants in the D.C. area serve a very similar menu. Why don’t we see more variety of recipes?


2. Coyote writes about how all of the remodeled homes in the Phoenix area are built in exactly the same architectural style.


3. Half Sigma writes about how there were no smoke-free bars before the big bad government mandated it, even though people like him greatly benefit from having them.


4. Bryan Caplan wonders why there are so many frame shops in Fairfax County. Why doesn’t the fiftieth frame shop instead become the first custom bookshelf shop?


5. Until some time in the 1930’s, the only color of automobile you could buy on the U.S. market (and probably other markets) was black.


6. Baseball famously integrated in 1947 when Branch Rickey chose Jackie Robinson to be on the Brooklyn Dodgers. However, there was a very talented generation of black baseball stars, including the legendary Satchel Paige, who missed out on Major League Baseball. Why did no baseball club before the Dodgers hire Satchel Paige or any other black baseball player?

In all these cases, the free market seemed to fail to produce the kinds of outcomes that we would have hoped. There are certainly specific explanations for each of these cases. But in general, the market can fail to produce certain types of innovations, and it is reasonable to ask, “why?”

Now don’t get me wrong; I’m not claiming that a free market never produces innovations. The free market does produce many wonderful innovations. But when you look at the innovations that really changed our lives, many of them came from spin-offs of military technology, other innovations come from giant corporations that already dominated the market, and many others came from people who never really cashed in on their innovation. Patent law and copyright law does offer some protection for creative people, but many times, the creative person successfully creates a market for someone else to cash in on.

The big money rarely goes to the first entrant into the market, it goes to people like Michael Dell of Dell Computer who came very late to the market and took it over by being a little better than everyone else. Sure, Dell Computer is innovative and I wouldn’t begrudge Dell’s contribution to the industry. But Dell Computer is innovative in a particular way. They aren’t making new goods; they are making existing goods better. This the insight I gave in my article magic in the marketplace: the big money come from people who create technology that no one can figure out how to duplicate.

In each of the above examples, the failure to innovate was primarily because it was so easy to duplicate the innovation. Innovations are public goods: they tell the world that there is a market for this innovation. Free markets don’t produce public goods in abundance. Let’s look at some examples.

In the entire decade of the 1920’s, the only color of car on the market was black. Who would want a black car, especially if everyone else had one? Maybe it isn’t a big deal but it does seem really peculiar. I read somewhere that the black paint was superior to all other car paints at that time. But cannot be the total explanation. Suppose an entrepreneur develops high quality red car paint and tries to sell it to automakers at a slight premium to the original black paint. Would anyone buy it? If Ford wasn’t interested in it, I doubt any other manufacturer would be either. If a small manufacturer buys red paint and tries sell some red cars at a premium; two things will happen: either he finds out that consumers aren’t willing to pay a premium for red cars and he loses money, or they are willing and he has exactly one good year before everyone else in the marketplace copies him. You cannot patent the idea of having a car of a different shade other than black. The innovator has to give away the game to create the market: he has to tell the world that there is a market for his minor innovation.

I go to Indian restaurants frequently and am always struck by the lack of variety of the food. You always get the same thing everywhere. Why doesn’t some restaurant try to be different? Well, suppose that you come out with a wonderful new dish. Can you patent that? It wouldn’t be worth the trouble for a small restaurant to try, even if it were possible. A new dish might make someone a lot of money, but not necessarily the person who creates it. The money might be made by the person who tastes the dish and decides he can make it a little better and a little cheaper.

For many years, all restaurants had smokers and non-smokers mixed together. If you didn’t like smoking, tough, you could eat at home. Restaurants then began offering smoke-free sections, but the smoke would invariably enter that section anyway. And the smoke-free section was typically too small. Bars never made any real effort to make a smoke-free environment. Bar owners believed that their clientele were smokers, but that was only because non-smokers couldn’t stand all the smoke in bars. Why didn’t we see smoke-free restaurants and bars before the government mandated the change? Again, think about the innovator. Either he finds out that there is no market for non-smoking bars and loses money or he finds that there is a market for them and someone else takes it over.

This suggests that there is a role for private charity or government to seed these innovations. A charity that was interested in promoting better public health might have provided some of the capital to start a smoke-free bar. It might have taken only a very small investment to start a revolution. I think the popularity of smoke-free bars shows that it just needed a catalyst to get it going. A charity might have provided a cash reward to the first baseball team to have a black baseball player. Once the color barrier was broken, competition would have done the rest. And charitible prizes (similar to the Nobel Prize) could reward innovators who never really cashed in on thier innovations.

The government could spur innovations by issuing a new kind of mini-patent. I could not justify giving a 17-year monopoly for something like a different color of car paint or a better recipe. But suppose the government issued a 5-year exclusive monopoly for any new innovation not yet on the market. Then we might see a self-cleaning toilet. Surely someone could produce one. The reason we don’t see any self-cleaning toilets is not because they are impossible to make but because they are too easy to make: everyone knows the first mover is going to do all the hard marketing work for somebody else. The mini-patent would prevent any other firm from entering the self-cleaning toilet market for five years. This would give a decent head-start to the first mover. And I guarantee that we will not see a self-cleaning toilet in the next five years so the government would be giving nothing away.

The wonderful thing about market is that, like an oyster, it can turn a small seed into a beautiful pearl. But you do need the seed.

Can anyone think of other examples of innovation failure?