Innovation, Openness, and Platform Control
Tulane University - A.B. Freeman School of Business
Marshall W. Van Alstyne
Boston University - Department of Management Information Systems; Massachusetts Institute of Technology (MIT) - Sloan School
December 3, 2013
Consider that a firm in charge of a business platform is a firm in charge of a microeconomy. To achieve the highest growth rate, how open should that economy be? To encourage third-party developers, how long should their intellectual property interests last? We address these questions through a sequential innovation model that balances two sets of tradeoffs. (i) Closing the platform increases the sponsor's ability to charge for access, while opening the platform increases developer ability to build upon it. (ii) The longer third-party developers retain property rights to their innovations, the higher the royalties they and the sponsor earn, but the sooner those developers rights expire, the sooner their innovations become a public good upon which other ecosystem developers can build. Our model allows us to characterize the optimal levels of openness and of IP duration in a platform ecosystem. We also model the relative profit potential of a sponsoring firm's decision to vertically integrate into downstream production as a closed hierarchy or to organize itself as a platform for open innovation. We use standard tools of Cobb-Douglas production and two-sided networks to derive our results. These findings can inform innovation strategy, choice of organizational form, intellectual property law, and management of competition.
Number of Pages in PDF File: 44
Keywords: Open Innovation, Sequential Innovation, Two-Sided Markets, Two Sided Networks, Platforms, Patent Length, Network Effects, Externalities, R&D Spillovers, Bundling, Vertical Integration
JEL Classification: L00, L11, L5, O3, O31, O32working papers series
Date posted: January 2, 2008 ; Last revised: July 1, 2014
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