Platform Ecosystems: How Developers Invert the Firm

12 Pages Posted: 31 Oct 2016

See all articles by Geoffrey Parker

Geoffrey Parker

Dartmouth College

Marshall W. Van Alstyne

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

Xiaoyue Jiang

Tulane University

Date Written: August 17, 2016


For a period starting in 2015, Apple, Google, and Microsoft became the most valuable companies in the world. Each was marked by an external developer ecosystem. Anecdotally, at least, developers matter. Using a formal model of code spillovers, we show how a rising number of developers can invert the firm. That is, firms will choose to innovate using open external contracts in preference to closed vertical integration. The locus of value creation moves from inside the firm to outside. Distinct from physical goods, digital goods afford firms the chance to optimize spillovers. Further, firms that pursue high risk innovations with more developers can be more profitable than firms that pursue low risk innovations with fewer developers. More developers give platform firms more chances at success. Our contribution is to show why developers might cause a shift in organizational form and to provide a theory of how platform firms optimize their own intellectual property regimes in order to maximize growth. We use stylized facts from multiple platform firms to illustrate our theory and results.

Keywords: Vertical Integration, Open Innovation, Sequential Innovation, Platforms, R&D Spillovers, Intellectual Property, Network Effects, Network Externalities, Open Source, Licensing, Two-Sided Networks, Two-Sided Markets, Standard Setting Organizations

JEL Classification: D02, D21, D62, D85, L00, L17, L22, L24, L5, O3, O31, O32, O34

Suggested Citation

Parker, Geoffrey and Van Alstyne, Marshall W. and Jiang, Xiaoyue, Platform Ecosystems: How Developers Invert the Firm (August 17, 2016). Boston University Questrom School of Business Research Paper No. 2861574, Available at SSRN: or

Geoffrey Parker

Dartmouth College ( email )

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


Marshall W. Van Alstyne (Contact Author)

Boston University – Questrom School of Business ( email )

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


Massachusetts Institute of Technology (MIT) - Sloan School ( email )

Initiative on the Digital Economy
245 First St, Room E94-1521
Cambridge, MA 02142
United States
617-253-0768 (Phone)


Xiaoyue Jiang

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

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