MANAGEMENT OF INNOVATION & PRODUCT DEVELOPMENT MBA TRACK

It is the most important business topic of all: identifying and fulfilling the unmet opportunity. Few business schools teach about it. Fewer still give you the experience of doing it.

The Management of Innovation and Product Development track teaches a rigorous and analytical process that structures the work involved in innovation, a process that allows innovation to be ongoing and replicable. Students gain not only knowledge and skills relevant to innovation but also gain experience in an innovation project. The initial phase of the innovation process is to identify problems to solve, which is to elicit what the target market wants even when they don’t yet know it. Middle phases focus on translating research findings into product specifications. The latter phase focuses on conceptualization and refinement of the solutions, both of the product prototype and of the solution business plan. Students learn and experience the process in the corporate-sponsored capstone course, where faculty from Carnegie Mellon’s top ranked schools of business, engineering, and fine arts provide coursework and team guidance.

By design, the track is multidisciplinary, using not only skills from various disciplines but also collaborative platforms to rapidly interconnect marketplace research, design insight, technology solutions, and business models. Companies are simultaneously becoming both analytical and innovative, making the experience and skills from the Management of Innovation and Product Development track relevant and valued in today’s marketplace. 

WHO SHOULD APPLY

Graduates of this track are adept at knowing not just how to solve problems but how to define them. They know how to collect and integrate varied perspectives into a valued product (software, service, system, or brand). They know how to communicate their concept in a proposal to senior management and to manage the project through to commercialization. Previous graduates have taken positions at small and large companies that are open to change, including Apple, eBay, PowerCast, RedZone Robotics, Plextronics, and IDEO. Students enrolling in the track should have a rigorous focus on understanding and documenting marketplace needs as well as company technologies, capabilities, and skills. They should be willing to shoulder risk to achieve what they find will be profitable for company and customers alike. Students should want to work in environments where they provide their own structure to their work, maybe even writing their own job description. In sum, applicants should not only exhibit intellectual achievement but also motivation, responsibility, perception, and an open mind.

REQUIRED TRACK COURSES 

Track course teach requisite skills for innovation as well as give students the experience of working with topics and people in other relevant disciplines. The track includes the following required courses.

• New Product Management
• Marketing Research
• Interpersonal Negotiation
• Groups and Team in Organizations
• Industrial Design Fundamentals
• Design for Manufacturing (or) Engineering Design (or) Quantitative Methods for Product Design and Development

Students with an engineering degree may be exempted from the engineering requirement. Likewise, students with a degree in industrial design may be exempted from the industrial design requirement. In addition to the required courses, students must complete an additional 1-2 electives selected by the student and approved by the track faculty coordinator.  Example electives include:

• Design History
• Pricing
• Marketing Communications and Buyer Behavior
• Business to Business Marketing
• Brand Strategy
• Entrepreneurial Thought & Action
• Organizational Power and Influence
• Managing Intellectual Capital & Knowledge Intensive Business
• Product Planning

The program culminates in a capstone project course that is sponsored by an industry partner. Past sponsors include Ford, New Balance, Respironics, BodyMedia, Dormont Manufacturing, and International Truck. Sponsoring companies have applied for more than 15 patents on student projects in the course.

FACULTY COORDINATOR

For further information about the Management of Innovation and Product Development track, please contact the faculty coordinator:

Peter Boatwright
Associate Professor of Marketing
Tepper School of Business
pbhb@andrew.cmu.edu

The private sector has dominated the development and delivery of transgenic, or GMO, crop varieties in all countries except China. The commercialization of GMOs has been highly concentrated. Just four crops (cotton, soybeans, maize, and canola) account for virtually all of the GMO area; 97% of world area occurs in five large countries, and 96% of world investment occurs in industrialized countries (James, 2002). Because GMOs originate in the private sector, they are subject to intellectual property (IP) protection. This confers limited monopoly power to innovators and affects research and development (R&D) investment incentives, pricing strategies, and the availability of technology. When the monopolist/innovator is able to prevent buyers from reselling their product, they may be able to price discriminate to accentuate the effects of monopoly power.

In this paper we examine the welfare effects of monopoly and price discrimination in the marketing of biotechnology discoveries. Two main issues are examined. The first issue is the general case of the distribution of benefits when the attempt to price discriminate is added to the effect of intellectual property rights (IPR)-induced monopoly power. Secondly, the effect of price discrimination on the availability of technology in small markets is examined. We demonstrate that even though price discrimination is often considered to be an unwanted market distortion, it may increase total welfare by increasing total output and by making goods available in markets where they would not appear otherwise. The policy implication is that in some cases, allowing price discrimination may be a desirable policy for encouraging private-sector investment in small markets. Several empirical studies have shown that farmers can receive significant benefits from private-sector provision of improved inputs, even in the presence of monopoly power (e.g., Falck-Zepeda, Traxler, & Nelson, 2000; Jefferson-Moore & Traxler, in press; Oehmke & Wolf, 2004; Qaim & Traxler, 2005), but the effect of price discrimination has not been examined within this context.

At present, the majority of biotechnology investments occur in developed countries (Table 1), and about 70% of that investment is from private sources. Few developing countries currently have access to biotechnology products, and virtually all biotechnology products used in developing countries today are spillovers from developed countries.

Monopoly Pricing and Price Discrimination

A monopoly does not always lead to inefficient production due to price-setting behavior. Marginal cost pricing under perfect competition does not guarantee efficiency, because revenues from marginal cost pricing may not always cover total costs and may reduce future investment (Varian, 1996). Robinson (1933) pointed out that the comparison between monopoly and competitive output levels under similar cost structures may be flawed, because a monopolist can only exist in an imperfect market. In addition, the monopolist may have a different cost structure, including a downward-sloping marginal cost curve, from that of the (long run) total cost structure of the perfectly competitive market (Robinson, 1933). Moschini and Lapan (1999) also showed that if the efficiency of the improved seed compared to the conventional variety is high enough, then the monopolist price measured in efficiency units may be lower than the price of conventional seed when measured in efficiency units.

Under certain conditions, it is possible for a monopolist to price discriminate. For the monopolist to take advantage of the different valuation of the output by consumers, arbitrage opportunities must be absent, and the market must be segmented.

The output level and welfare impact of adding price discrimination to monopoly power has received a significant amount of attention dating back to Pigou (1920) and Robinson (1933) with substantial recent contributions from Varian (1985,1996), Schmalensee (1981), and others. Few general conclusions can be drawn from the literature, but the change in output and welfare induced through price discrimination can be analytically determined for any given case. Robinson showed that differences in “concavities” of the marginal revenue curves of the separate markets is necessary for price discrimination to lead to an increase in total output. She went on to say that whenever total output produced under discrimination is higher than under simple monopoly, society is better off, and in situations where total output under discrimination and simple monopoly are the same, society may be better off depending on the tradeoff between welfare of the “weak” (more elastic) markets compared to the “strong” (less elastic) markets. A number of studies, including Schmalensee (1981), Varian (1985), Shih, Mai, and Liu (1988), and Layson (1988) have attempted to refine these claims.

A review of these studies indicates that whether discrimination leads to an increase or decrease in social welfare is an empirical question. Knowledge of the shape of the demand and marginal revenue curves and the magnitude of the demand elasticities (and to some extent, the shape of the marginal cost curve) help to determine the sign and magnitude of the change in welfare. However, it is unequivocal that with price discrimination, total output and welfare will increase if small (niche) markets that would otherwise be priced out of the market for the technology enter the market at the lower discriminated price (Varian, 1996).

Three types of price discrimination are discussed in the literature. We assume third-degree price discrimination in the market for cotton seed.¹ Here, buyers may be grouped into a number of separate segments. Each segment pays a different price for the same output. The more elastic group pays a lower price than the less elastic markets. With regard to the welfare implications of third-degree price discrimination, the seller captures more of the benefits and possibly less deadweight loss than a nondiscriminating monopolist. In addition, there is a redistribution of benefits among buyers—from the less elastic to the more elastic markets.

Price Discrimination in the Seed Market

The sunk or fixed costs of developing an innovation such as herbicide tolerance are often large. However, once developed, the marginal cost of producing additional improved seed is very small. The laws and enforcement of intellectual property rights (IPR) have provided innovating firms with some monopoly power in the market for seeds (Falck-Zepeda et al., 2000), allowing the innovating firms to set a price higher than marginal cost. This provides a powerful incentive for private-sector innovation, for without monopoly power innovators may not be able to cover their total costs, thus restricting the range of technologies available to farmers. In the section that follows we present a model that compares the welfare consequences of price discrimination versus a one-price policy for an IP protected innovation suitable for two separated markets. The implication is that if the ability to price discriminate is restricted through natural arbitrage or commercial policy, total welfare may be less.

Bt cotton presents a case of potential price discrimination. Monsanto has been essentially a monopoly supplier of Bt cotton because it owns the patents to the key genetic events—even though a number of seed companies sell a number of different varieties of Bt cotton, they all rely on the same genetic event. (In 2003, Dow and Syngenta each successfully petitioned for deregulation of a genetically modified Bt cotton variety, which may erode Monsanto’s monopoly position.) The potential for a monopolist to price discriminate in Bt cotton exists for two reasons. First, upland cotton varieties tend to react to small agro-climatic variations, restricting possibilities for spatial arbitrage. This allows a certain amount of price discrimination by geographic area. Second, Monsanto (or other companies) could require the farmer to sign a technology contract with a “no resale” clause in it, effectively segmenting the market.

The Model

Assume that the price-discriminating monopolist faces two or more demand schedules that describe the monopolist’s markets: Q₁ = Q₁(P) and Q₂ = Q₂(P). With price (P), total demand faced by the monopolist is then

The nondiscriminating monopolist maximizes profit such that

where MR_T is the marginal revenue of total demand, MC(Q_T) is the marginal cost of production, and η_T = ∂Q_TP / ∂PQ_T is the elasticity of total demand. The profit-maximizing total quantity produced by the nondiscriminating monopolist is

The price-discriminating monopolist maximizes profits when MR₁ = MR₂ = MR_T= MC(Q_T) = c′(Q_T), so for market i,

where η_i = ∂Q_iP_i / ∂P_iQ_i is the elasticity of market i demand. Thus, the profit-maximizing total quantity produced by the discriminating monopolist is

As shown by Robinson (1933), Schmalensee (1981), and Varian (1985), there is an increase in welfare from a simple monopoly to a price-discriminating monopoly only if total quantity produced increases. Welfare change is the sum of monopoly profit and consumer surplus changes.² Consumer surplus changes are the change in the area beneath the respective demand curves as a result of the price changes, and monopoly profit is the product of the difference between the technology fee and average cost (or marginal cost, because we model constant marginal cost) and the quantity of seed demanded by the market.

Welfare Calculations

To calculate the distribution of benefits from price discrimination we follow the general procedures outlined in Alston, Norton, and Pardey (1996). Farmer benefits from discrimination are the change in consumer surplus—the area beneath the respective input demand curves and above the market price. Benefits to the innovator are taken to be the change in monopoly profit—the area above the marginal cost curve and the below the price in each market.

If the output market is competitive, the change in consumer surplus measured in the input market is equal to the change in total surplus in the output market (Jacobsen 1979; Schmalensee, 1976). For this study, we assume that farmers sell their output in a competitive market, so total welfare change from the introduction of the improved technology is the sum of the change in monopoly profit in the intermediate (seed) market and the change in consumer surplus in the input market (Moschini & Lapan, 1997). Also, Just and Hueth (1979) showed that when demand curves are estimated econometrically without including prices in other linked markets, the demand obtained is equivalent to a general equilibrium demand curve, and thus the welfare areas calculated in the seed market comprise the total welfare change within the system.

Data

We use data from Hubbell, Marra, and Carlson (2000) empirically to examine the case of potential price discrimination in Bt cotton. Hubbell et al. (2000) presented, using data for 1996, the Bt cotton demand of cotton growers in Alabama, Georgia, North Carolina, and South Carolina divided into two regions (Upper South and Lower South) with different levels of insect resistance to pesticides and therefore with two derived demand curves. The objective of their study was to simulate the costs of reducing conventional insecticide applications through subsidization of Bt cotton. The total Bt cotton seed demand for the region comprises the Upper South (North Carolina and South Carolina) with no resistance experience (US/NR) and the Lower South (Alabama and Georgia) with some resistance experience (LS/R). Demand for Bt cotton is less elastic when insects are resistant to chemical pesticides. Data for Hubbell et al. (2000) were obtained from a survey of cotton growers conducted in 1997. From Hubbell et al. (2000), Bt cotton demand was:

where BTACRES is the number of acres planted to Bt cotton, Pr(z(p)) is the probability that a farmer adopts the Bt cotton technology at price p, BTPROP is the proportion of cotton land planted to Bt cotton once the decision is made to adopt, and TOTCOT is the total cotton area in the region. Further, the probability of adoption is calculated as Pr(z(p)) = 1 - Φ(z(p)), where Φ(z) is the standard normal cumulative density, and z(p) = x′β + α(Δy - p) was estimated to obtain estimates of β and α, the coefficients of the variables of farm and farmer attributes (x) and price, respectively. Farm and farmer attributes included in thex vector were total acres planted to cotton, share of income from cotton, percentage damaged bolls in 1995, operator’s age, number of years of growing cotton, and dummy variables for insect resistance to conventional insecticides experienced in 1995, farm location, and college education by the operator.

The proportion of cotton land planted to Bt cotton was estimated asBTPROP(v(p)) = w′γ_w + γ_pp + γ_λλ, where w is the vector of farm and farmer attributes and λ(z(p)) is the Mills ratio included as a variable, because BTPROP is only observed for those farmers who either adopted in 1996 or indicated their willingness to adopt at the hypothetical technology fee. Farm and farmer attributes included in the BTPROP equation were share of income from cotton, percentage damaged bolls in 1995, number of years growing cotton, and dummy variables for insect resistance to conventional insecticides experienced in 1995, farm location, and college education by the operator.

Results and Discussion

Using the demand curves for US/NR and LS/R from Hubbell et al. (2000), we determined the profit-maximizing discrimination prices and quantities for each region when the innovator (monopolist) is able to discriminate. The marginal cost of the innovator was estimated from the technology fee and the total demand elasticity (using Equation 2). The elasticity of total demand at a given price was estimated as

Given the demand function in Equation 6, elasticity of demand in market i = US/NR, LS/R is

At the observed market price in 1996 of $32/acre, the elasticity of total demand was estimated as -2.1, which results in an implied marginal cost of $16.88/acre.

We assume constant marginal cost and the same cost structure whether or not discrimination occurs.³ By equating the individual marginal revenues to estimated marginal cost of total production, we obtained the profit-maximizing prices that the price-discriminating innovator can charge in each market. Figure 1 presents an initial situation under monopoly pricing (selling quantities a and bin the two markets), where total marginal revenue equals marginal cost, and shows the potential change from uniform pricing to price discrimination. Because US/NR is the more elastic market, the innovator charges a lower price (at point c) and sells more (from point b to point f) to farmers in that region and charges a higher price (at point d) and sells less (from point a to point g) to farmers in the less elastic market. With a marginal cost of about $16.88/acre, the innovator can charge about $25.92/acre in US/NR and about $33.09/acre in LS/R.

At the discriminatory prices, the number of acres cultivated to Bt cotton would increase from about 60 to 142 thousand acres in US/NR and decrease from about 747 to 701 thousand acres in LS/R. The total number of Bt cotton acres will increase by about 35 thousand acres. Table 2 shows the change in quantities, prices, and welfare in both markets after price discrimination. Under price discrimination, total welfare, computed as the sum of consumer surplus and monopoly profit, increases.⁴ Welfare to farmers in US/NR increases by about 32%, while welfare to farmers in LS/R decreases by about 3% of the value of Bt cotton seed initially sold in each market. The monopolist’s profits increase by 2%.

Because both markets were being served under uniform pricing, welfare of farmers in one of the markets (in this example, LS/R) necessarily decreases under differential pricing.

Conclusion

In this paper, we analyzed the welfare effect of adding price discrimination to monopoly power in the provision of IP-protected innovations. The theoretical literature has produced few general results regarding the welfare implications of price discrimination, suggesting that empirical studies are needed. We presented a general analytical model which was parameterized using data from the introduction of Bt cotton in the southern United States. Results suggest that where both markets are being served under a one-price policy, there is a welfare loss to farmers in the less elastic market and gains to the innovator and farmers in the more elastic market.

In the Bt cotton case, the fact that the innovator (Monsanto) was not price discriminating at the time the data for this study were collected may have been due to the difficulty in preventing arbitrage between markets. Spatial arbitrage is more difficult when the second market is in a developing country (niche) market because of the geographical separation of the two markets. In this situation, a policy of differential input pricing will benefit the innovator by helping defray the investment incurred by the innovators and may represent a path for assisting developing countries to gain access to new technologies generated by R&D efforts.

A more interesting case is that of a small market not being served under uniform pricing (for instance, the case of most developing countries) but that may obtain access to the technology under price discrimination. The ability to use price discrimination to market biotechnology innovations in separated markets may be more important for developing countries to access these innovations, even though this is a controversial subject. However, this is a potentially important strategy for providing access to needed technology that may benefit both the biotechnology industry and the small market countries. Without access to cost-reducing technologies, developing countries that compete with developed-country producers will see welfare reduced because of the output price-reducing impact of technological change. Putting in place conditions under which firms are able to price discriminate across international markets holds the potential to enhance developing-country access to private-sector technology.

Endnotes

¹ We model third-degree price discrimination, which may occur when markets are characterized by different demand schedules and when few arbitrage opportunities exist. To some extent, this form of price discrimination is curently employed by innovators who charge lower prices in some (small and more elastic) foreign markets than in (large and less elastic) domestic markets. First- and second-degree price discrimination, characterized by charging a different price for each unit and by charging different prices depending on the quantity purchased, are not likely to occur in the cotton seed market.

² Benefits to cotton producers are referred to as consumer surplus, because we are dealing with the market for seed.

³ This is assumed to simplify the analysis, but even if this were not true, the relevant marginal cost for determining the discriminating prices and quantities for the two regions is the marginal cost of total production. Thus, assuming constant marginal cost is not a limiting assumption. However, if the cost structure of the innovator changes if they are allowed or able to discriminate, then the shape/slope of the marginal cost would be significant.

⁴ The demand functions are not linear, so the estimates of consumer surplus obtained are only approximations—but good approximations, because the price changes are not too large.

References

Alston, J.M., Norton, G.W., & Pardey, P.G. (1996). Science under scarcity: Principles and practices for agricultural research evaluation and priority setting. Ithaca, NY: Cornell University Press.

Falck-Zepeda, J.B., Traxler G., & Nelson R.G. (2000). Surplus distribution from the introduction of a biotechnology innovation. American Journal of Agricultural Economics, 82(2), 360-369.

Jacobsen, S.E. (1979). On the equivalence of input and output market marshallian surplus measures. American Economic Review, 69(3), 423-428.

James, C. (2002). Global review of commercialized transgenic crops: 2001 feature: Bt cotton (ISAAA briefs 26). Ithaca, NY: International Service for the Acquisition of Agri-biotech Applications. Available on the World Wide Web:http://www.isaaa.org/kc/Publications/pdfs/isaaabriefs/Briefs%2026a.pdf.

Jefferson-Moore, K.Y., & Traxler, G. (in press). Second-generation GMOs: Where to from here? AgBioForum. Available on the World Wide Web:http://www.agbioforum.org/.

Just, R.E., & Hueth, D.L. (1979). Welfare measures in a multimarket framework.American Economic Review, 69(5), 947-954.

Hubbell, B.J., Marra, M.C., & Carlson, G.A. (2000). Estimating the demand for a new technology: Bt cotton and insecticide policies. American Journal of Agricultural Economics, 82(1), 118-132.

Layson, S. (1988). Third-degree price discrimination, welfare and profits: A geometrical analysis. American Economic Review, 78(5), 1131-1132.

Moschini, G., & Lapan, H. (1997). Intellectual property rights and the welfare effects of agricultural R&D. American Journal of Agricultural Economics, 79(4), 1229-1242.

Oehmke, J.F., & Wolf, C.A. (2004). Why is Monsanto leaving money on the table? Monopoly pricing and technology valuation distributions with heterogeneous adopters. Journal of Agricultural and Applied Economics, 36(3), 705-718.

Pigou, A.C. (1920). The economics of welfare (1st ed.). London: Macmillan.

Qaim, M., & Traxler, G. (2005). Roundup ready soybeans in Argentina: Farm level, environmental, and welfare effects. Agricultural Economics, 32(1), 73-86.

Robinson, J. (1933). The economics of imperfect competition (1st ed.). London: Macmillan.

Schmalensee, R. (1976). Another look at the social valuation of input price changes. American Economic Review, 66(1), 239-243.

Schmalensee, R. (1981). Output and welfare implications of monopolistic third-degree price discrimination. American Economic Review, 71(1), 242-247.

Shih, J., Mai C., & Liu J. (1988). A general analysis of the output effect under third-degree price discrimination. Economic Journal, 98(389), 149-158.

Varian, H.R. (1985). Price discrimination and social welfare. American Economic Review, 75(4), 870-875.

Varian, H.R. (1996). Differential pricing and efficiency. First Monday, 1(2). Available on the World Wide Web:http://www.firstmonday.dk/issues/issue2/different/index.html.

Authors’ Notes

Albert K.A. Acquaye is a project economist in the Department of Agricultural and Resource Economics, University of California, Davis. Greg Traxler is a professor in the Department of Agricultural Economics and Rural Sociology, Auburn University. The authors wish to thank Michele Marra for kindly agreeing to share data for use in this study and James Oehmke and Carl Pray for their useful comments and suggestions. Financial support was received from the USDA/IFAFS.

Strategies for sustainable design of nanotechnology products

Innovations in Nanotechnology (NT) inspire designers and entrepreneurs to deploy nanomaterials for the creation of products that offer superior functions. There are high expectations on NT to enable substantial benefits for sustainable production and consumption. For instance, there are opportunities for improvements of energy and resource efficiency in various industrial and consumer sectors. Moreover, reduction in the use of hazardous chemical substances in products seems possible if nanomaterials replace for them. On the other hand, the use of nanoparticles in consumer products has given raise to concerns over their safety to human health and the environment. Thus far, the scientific knowledge on risks of NT is insufficient but there are early warnings that free nanoparticles can have adverse side effects.

How can prudent designers and enterprises utilize NT for the creation of innovative products that are economically and ecologically sustainable? How to take advantage of NT while avoiding unsustainable side effects?

The workshop provides a forum for knowledge cooperation and networking among researchers, designers and entrepreneurs that are interested in NT. It allows for exchange of ideas on sustainable NT and experiences (lessons learned) with mitigating risks. The aim of the workshop is encouraging a goal-oriented discussion on risk preventative innovation strategies in NT. The session starts with a short introduction in the opportunities and risks of NT as a basis for further discourse. Then, the participants engage in parallel round table discussions. They will be prompted with pre-defined questions and asked to elaborate propositions how to use NT in service of sustainable innovation.

The intended outcome of the workshop is an agenda to move nanotechnology into the real world in a sustainable way for the benefit of society, the economy and the environment.

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