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An assumption held by those who espouse perfectly competitive markets is that more competition induces more innovation. In platform industries, the reasoning follows that high levels of entry by makers of complementary products will intensify competition, spur creation of new products and increase demand for the platform- thus platform owners want to attract maximum complementary developers.
The popular view of "more competition, more innovation" has limitations. The line of reasoning finds challenges in research skeptical of perfectly open systems. On this issue, Professor Kevin Boudreau of MIT has released a working paper arguing that beyond a certain level, entry in complementary markets can reach a point where innovation decreases. Too Many Complementors? Evidence on Software Developers (February 2007). Available at SSRN.
The importance of Boudreau's work is that innovation may be increased by owners of proprietary platforms, who rely on external development of complementaries, by raising the ladder for new entrants.
In "over-crowded" complementary markets, innovation may not just simply stall, but actually decrease. Boudreau extends his argument with an experiment showing that excessive entry by firms selling close substitutes diminishes innovation, while entry by developers selling non-similar complements, and thus not competing directly, did not. Restricting entry to just several hundred developers’ software firms would have led to more active software development, more investment and presumably higher quality. The finding of sharp crowding among close substitutes further suggests that careful selection of partners and avoiding excessive rivalry could have further enhanced development and plausibly allocated incentives more deliberately across product categories. There is generally a positive correlation between the number of firms in a market and the number of: 1) programs, 2) rate of creation for new programs. Thus, while healthy levels of entry can suggest productive competition and markets, entry alone should not be the primary means of gauging the environment for innovation. The complexity of the issue is further seen in the fact that there is not a fixed-point crowding out effect for entry and innovation; where innovation starts decreasing can vary by market.
Boudreau’s research has implications for FOSS, a development model with virtually no barriers to entry. Boudreau suggests that FOSS might restrict entry into projects to capture an optimal level of “openess” that stirs innovation. Thus, a lot of commentary on Linux's relative non-progression in complementaries compared to proprietary counterparts may be mis-focused on the issue of technical complexity rather than incentive dynamics of complementary development surrounding a platform.
posted by Noel Le @ 7:30 AM | Academia
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