Innovation, Openness, and Platform Control

TLDR

A platform firm governs a microeconomy. The study seeks to determine the optimal degree of platform openness and intellectual property duration to maximize growth and developer incentives. The authors develop a sequential innovation model using Cobb–Douglas production technologies to characterize the trade‑offs between platform openness, IP duration, and revenue. The model’s results provide guidance for innovation strategy, organizational structure, IP non‑compete policies, and regulation. Accepted by Chris Forman, Information Systems.

Abstract

Suppose that a firm in charge of a business ecosystem 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 trade-offs 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 intellectual property (IP) duration in a platform ecosystem. We use standard Cobb–Douglas production technologies to derive our results. These findings can inform innovation strategy, choice of organizational form, IP noncompete decisions, and regulation policy. This paper was accepted by Chris Forman, information systems.