User innovation and network effects. The case of video games

New models of knowledge creation are emerging, where the user community is a major source of innovation development. But, how does user innovation impact on producer sales, and the other way round? In this paper, the mutual benefits deriving from the user-producer interaction are analyzed in terms of network effects and on a basis of a unique panel data set of weekly observations in the context of video games and their user-generated, free modifications. The estimates of a system of equations modelling the original good’s retail demand function and the user innovation dynamics show that user-generated complements spur the demand for the original product and smooth the consumer price sensitivity. User innovation increases with the crowd of complementors up to a certain threshold and decreases afterwards, thus following a non-monotonic pattern.