Altruism or Shrewd Business? Implications of Technology Openness on Platform Innovations and Competition

38 Pages Posted: 16 May 2016 Last revised: 15 Aug 2016

See all articles by He Huang

He Huang

Chongqing University

Geoffrey Parker

Dartmouth College

Yinliang (Ricky) Tan

Tulane University - A.B. Freeman School of Business

Hongyan XU

Chongqing University - School of Economy and Business Administration

Date Written: July 28, 2016

Abstract

In today’s highly competitive business environment, a growing number of platforms are opening their technologies. This leads us to wonder whether sharing one’s proprietary technology is altruism or a shrewd business move. In this paper, we study the incentive of why firms share their proprietary technology with their competitors. In contrast to previous literature focusing on network effects, our study reveals a novel explanation for why firms are willing to open their technologies. We focus on two effects driven by the decision of technology openness. On the one hand, a commitment to share technology leads to information disclosure (information effect). The competitor will learn the other firm’s technology level whether it decides to adopt or not. On the other hand, opening one’s technology might contribute to technology access (access effect). That is, the competitor firm has the opportunity to incur learning costs to absorb the other firm’s technology. The decision regarding technology openness critically depends on the trade-off between the information effect and the access effect. More importantly, the interaction of these two effects is moderated by the magnitude of learning cost. We find that when the learning cost of acquiring new technology is negligible, given openness, the access effect dominates the information effect, which leads to the equilibrium strategy where both firms close their technology. However, when the learning cost is substantial, the access effect recedes and technology openness can benefit the firm through the information effect. This is because openness can reduce innovation competition that is otherwise caused by technology uncertainty stemming from the closed strategy. We also discuss the impact of technology openness on the degree of innovation and find that opening technology does not necessarily lead to higher innovation. We further explore several extended models including unobservability of learning, third-party innovation and asymmetric firms, and show that our intuition of the base model is robust and enriched.

Keywords: Economics of IS, IT Innovation Investment, Technology Openness, Platform Economy

Suggested Citation

Huang, He and Parker, Geoffrey and Tan, Yinliang and XU, Hongyan, Altruism or Shrewd Business? Implications of Technology Openness on Platform Innovations and Competition (July 28, 2016). Available at SSRN: https://ssrn.com/abstract=2778834 or http://dx.doi.org/10.2139/ssrn.2778834

He Huang

Chongqing University ( email )

Chongqing 400044, Chongqing 400030
China

Geoffrey Parker

Dartmouth College ( email )

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

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

Yinliang Tan (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Hongyan XU

Chongqing University - School of Economy and Business Administration ( email )

No.174 Shazhengjie
Shapingba
Chongqing, Chongqing 400044
China

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