U.S. investment banks have introduced and impressive list of innovative financial products. Bankers estimate that developing a new financial product requires and investment of $50,000 to $5 million. Yet the securities they create cannot be patented and SEC regulations compel innovators to disclose quite detailed information about product design. Thus rivals can copy the product at low cost and exploit the innovating bank's investment in educating investors, issuers, and regulators. Bankers estimate that imitators incur cost that are only 25 to 50 percent of the costs incurred by innovators. If financial innovation is profitable, these cost disadvantages of innovation must be offset by other benefits - firs-mover advantages. These advantages might include higher prices, lower costs, or larger volume.
In a study of 58 financial innovations that raised almost $280 billion over the period 1974-1987, there is no evidence that innovative banks charged higher prices during the brief "monopoly" period prior to the introduction of imitative products. In the longer run, they actually charged prices that were lower than those of their imitative rivals. This result should not be extraordinarily surprising. Investment banks typically choose one of their customers as the issuer of an innovative product. These issuers will have special burdens placed on them in explaining the innovative product to investors, regulators, and rating agencies. If immediately following the offering, a rival firm was to issue an imitative product at a lower cost using a competing investment bank; the firm's managers might be understandably annoyed. Thus, investment banks profit from product innovation in ways other than charging higher prices. They underwrite more offers of the products they innovate than do imitating rivals. Innovation also appears to lower costs by allowing banks to exploit economies of scope and learning effects.Give an opinion and compare with other companies