The Market for Ideas : Making Complex Innovations from New Combinations of Inventions

The market for ideas makes new combinations of inventions to form complex innovations such smart phones and mobile broadband networks. I show that bargaining in the market for ideas provides efficient coordination with complementary inventions. Extending neoclassical economic tools to the market for ideas, I obtain a marginal rate of technical substitution for product and process innovations that indicates production and welfare trade-offs. I develop pass-through measures of technological change showing that prices rise with product innovations and decrease with process innovations. With risky R&D, downstream competition increases (decreases) incentives to invent following Arrow (Schumpeter) based on product market features