Innovation, Openness, and Platform Control

43 Pages Posted: 2 Jan 2008 Last revised: 8 Oct 2016

Geoffrey Parker

Dartmouth College

Marshall W. Van Alstyne

Boston University – Questrom School of Business; Massachusetts Institute of Technology (MIT) - Sloan School

Date Written: October 3, 2016

Abstract

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 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.

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

Suggested Citation

Parker, Geoffrey and Van Alstyne, Marshall W., Innovation, Openness, and Platform Control (October 3, 2016). Available at SSRN: https://ssrn.com/abstract=1079712 or http://dx.doi.org/10.2139/ssrn.1079712

Geoffrey Parker (Contact Author)

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-9075 (Phone)

HOME PAGE: http://engineering.dartmouth.edu/people/faculty/geoffrey-parker

Marshall W. Van Alstyne

Boston University – Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-3571 (Phone)

HOME PAGE: http://questromapps.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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