PRODUCT INNOVATION WITH MASS-PRODUCTION - INSUFFICIENT OR EXCESSIVE

Significant product innovation often entails standardization of produc t characteristics and mass-production. This paper examines the market outcome and social-welfare property of product innovation involving ma ss-production. It is shown that the share of mass-producers has tenden cy to be larger than the social optimum. The equilibrium share of mass -produced products is determined by the indifference condition of the marginal customer, while the optimal share is based on the indifferenc e condition of the average customer. Since the marginal customer's ben efit of using local products is lower than the average customer's, con sumers move to mass-produced products more than desired. However, if t here is positive externality among consumers in using mass-produced pr oducts, the market may have multiple equilibrium and the conclusion of excessive share of mass-produced products in market equilibrium may b e reversed.