Strategic Intellectual Property Sharing: Competition on an Open Technology Platform Under Network Effects

Abstract

In this paper, we explore the strategic decision of an incumbent to open a proprietary technology platform in order to allow same-side co-opetition in a market characterized by network effects. We propose a game-theoretic model that analytically conceptualizes the interplay among the degree of same-side platform openness, the absorptive capacity of the entrant, and the intensity of network effects. Our analysis uncovers interesting new results. First, when entrant product quality is exogenous, under very strong network effects, the incumbent closes the technology. Moreover, we discuss various interesting open-platform co-opetition outcomes that arise under a fully covered market. When the entrant chooses the quality level and the incumbent is strategic in its platform opening decision, we find that intense network effects make new players shun the market, so IP-sharing is not possible in equilibrium. When the network effects are of intermediate intensity, the incumbent opens the technology to the entrants who possess a sufficiently high absorptive capacity, calibrating the amount of sharing to the entrant's absorptive capacity level to ensure that the duopoly setting is mutually beneficial. Our key findings and insights are robust to several model extensions, including scenarios when the incumbent is uncertain of the entrant's absorptive capacity, or when the entrant incurs a general non-linear development cost structure. We also compare and contrast bounded vs. unbounded market scenarios. We further explore the ability of the incumbent to engineer the strength of network effects in the market and uncover non-trivial alternating-monotonicity patterns for the optimal intensity of network effects with respect to the entrant's absorptive capacity. We also show that a model with exogenous network effects could drastically underestimate the range of entrants' absorptive capacity values for which the incumbent should open its platform, causing the latter to miss valuable co-opetition opportunities. We also discuss various managerial implications of our theoretical framework.

Keywords: platform economics, openness, intellectual property, network effects, competition, co-opetition, absorptive capacity, software

JEL Classification: L86, O34