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
October 3, 2014
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? Defining a business platform as an open standard together with a default contract, we develop a sequential innovation model that addresses the tradeoffs inherent in these two decisions: (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 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 developers can build. Our model allows us to characterize the optimal levels of openness and of IP duration in a platform ecosystem. 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, and regulation policy.
Number of Pages in PDF File: 37
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, O32
Date posted: January 2, 2008 ; Last revised: October 4, 2014
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