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The Impact of Modularity on Intellectual Property and Value Appropriation

40 Pages Posted: 12 Dec 2011 Last revised: 21 Nov 2012

Carliss Y. Baldwin

Harvard Business School, Finance Unit

Joachim Henkel

TUM School of Management - Technische Universität München (TUM); Centre for Economic Policy Research (CEPR)

Date Written: November 20, 2012

Abstract

Modularity is a means of partitioning technical knowledge about a product or process. When state-sanctioned intellectual property rights are ineffective or costly to enforce, modularity can be used to hide information and thus protect intellectual property (IP). We investigate the impact of modularity on IP protection by formally modeling three different threats to the value of IP: (1) unauthorized use by known agents; imitation or substitution by third parties; and the withdrawal of IP by agents or third party owners. For each threat, we consider the impact of modularity in the presence or absence of an effective legal system. The models permit us to identify specific strategies for protecting IP and thus capturing value in modular systems. We illustrate each of the major strategies with examples from practice.

Keywords: Modularity, value appropriation, intellectual property

Suggested Citation

Baldwin, Carliss Y. and Henkel, Joachim, The Impact of Modularity on Intellectual Property and Value Appropriation (November 20, 2012). Harvard Business School Finance Working Paper No. 12-040. Available at SSRN: https://ssrn.com/abstract=1971203 or http://dx.doi.org/10.2139/ssrn.1971203

Carliss Y. Baldwin (Contact Author)

Harvard Business School, Finance Unit ( email )

Boston, MA 02163
United States

Joachim Henkel

TUM School of Management - Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80333
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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