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 article, the mutual benefits deriving from the user–producer interaction are analyzed in terms of network effects and on a basis of a unique panel dataset of weekly observations in the context of video games and their user-generated, free modifications. The estimates of a system of equations modeling 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.