Abstract

http://ssrn.com/abstract=639165
 
 

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Innovation through Optimal Licensing in Free Markets and Free Software


Geoffrey Parker


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

September 2005


Abstract:     
We consider openness in private and socially optimal licenses under conditions where network effects and multiperiod innovation are both possible. For private firms, we model a variety of possible business models from completely closed to fully open, and find that opening a platform can increase profits based on network effects exclusively, innovation exclusively, or both. A firm's ability to control downstream innovation gives it reaon to rationally behave more like a social planner and even tolerate limited levels of piracy, interpreted as free user access. Further, open contracts with modest royalties offered to all developers can dominate closed Nash bargaining subcontracts with lead developers. We also find conditions when firms choose proprietary licenses despite innovation and network effects.

In social planning terms, we find that optimal protection for reusable information is not arbitrarily long. Overlong protection interferes the inputs to downstream innovation. Further, licenses must enforce shorter-than-privately-optimal disclosure terms. Otherwise, a prisoner's dilemma in private incentives limits free access to derivative work, essential for decentralized innovation. In modeling terms, we add to the recent literature on two-sided network effects by incorporating a production function on one side of the market. We also contribute a framing innovation that places several existing license types in a space suggesting that socially optimal but unexplored licenses might exist.

Number of Pages in PDF File: 30

Keywords: Innovation, Free Software, Open Source, Lead Users, Two-Sided Markets, Platform Goods, Copyright Length, CopyFlex, Network Effects, Network Externalities, Intellectual Property Rights

JEL Classification: D62, D92, H42, L86, O3

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Date posted: January 3, 2005  

Suggested Citation

Parker, Geoffrey and Van Alstyne, Marshall W., Innovation through Optimal Licensing in Free Markets and Free Software (September 2005). Available at SSRN: http://ssrn.com/abstract=639165 or http://dx.doi.org/10.2139/ssrn.639165

Contact Information

Geoffrey Parker
Tulane University - A.B. Freeman School of Business ( email )
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5000 (Phone)
504-865-6751 (Fax)
HOME PAGE: http://ggparker.net
Marshall W. Van Alstyne (Contact Author)
Boston University - Department of Management Information Systems ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-3571 (Phone)
HOME PAGE: http://smgapps.bu.edu/mgmt_new/profiles/VanAlstyneMarshall.html
Massachusetts Institute of Technology (MIT) - Sloan School ( email )
Center for Digital Business
5 Cambridge Center - NE25, 7th Floor
Cambridge, MA 02142
United States
617-253-0768 (Phone)
HOME PAGE: http://web.mit.edu/marshall/www/home.html
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