IDEAS home Printed from https://ideas.repec.org/p/ube/dpvwib/dp0707.html

On Platforms, Incomplete Contracts, and Open Source Software

Author

Listed:
  • Andras Niedermayer

Abstract

We consider a firm A initially owning a software platform (e.g. operating system) and an application for this platform. The specific knowledge of another firm B is needed to make the platform successful by creating a further application. When B's application is completed, A has incentives to expropriate the rents. Netscape claimed e.g. that this was the case with its browser running on MS Windows. We will argue that open sourcing or standardizing the platform is a warranty for B against expropriation of rents. The different pieces of software are considered as assets in the sense of the property rights literature (see Hart and Moore (Journal of Political Economy, 1990)). Two cases of joint ownership are considered beyond the standard cases of integration and non-integration: platform standardization (both parties can veto changes) and open source (no veto rights). In line with the literature, the more important a party's specific investments the more rights it should have. In contrast to Hart and Moore, however, joint ownership can be optimal in our setting. Open source is optimal if investments in the applications are more important than in the platform. The results are driven by the fact that in our model firms invest in physical (and not in human) capital and that there is non-rivalry in consumption for software.

Suggested Citation

  • Andras Niedermayer, 2007. "On Platforms, Incomplete Contracts, and Open Source Software," Diskussionsschriften dp0707, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp0707
    as

    Download full text from publisher

    File URL: https://repec.vwiit.ch/dp/dp0707.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Raghuram G. Rajan & Luigi Zingales, 1998. "Power in a Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 387-432.
    2. Richard J. Gilbert & Michael L. Katz, 2001. "An Economist's Guide to U.S. v. Microsoft," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 25-44, Spring.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    4. Choi, Jay Pil & Stefanadis, Christodoulos, 2001. "Tying, Investment, and the Dynamic Leverage Theory," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 52-71, Spring.
    5. Nicholas Economides & Evangelos Katsamakas, 2005. "Linux vs. Windows: A comparison of application and platform innovation incentives for open source and proprietary software platforms+," Working Papers 05-03, NET Institute, revised Sep 2005.
    6. West, Joel, 2003. "How open is open enough?: Melding proprietary and open source platform strategies," Research Policy, Elsevier, vol. 32(7), pages 1259-1285, July.
    7. repec:bla:jindec:v:48:y:2000:i:4:p:413-32 is not listed on IDEAS
    8. Caillaud, Bernard & Jullien, Bruno, 2003. "Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    9. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    10. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    11. Kevin Boudreau, 2010. "Open Platform Strategies and Innovation: Granting Access vs. Devolving Control," Management Science, INFORMS, vol. 56(10), pages 1849-1872, October.
    12. Rosenkranz, Stephanie & Schmitz, Patrick W., 1999. "Know-how disclosure and incomplete contracts," Economics Letters, Elsevier, vol. 63(2), pages 181-185, May.
    13. Josh Lerner & Jean Tirole, 2005. "The Economics of Technology Sharing: Open Source and Beyond," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 99-120, Spring.
    14. Andras Niedermayer, 2006. "Does a Platform Monopolist Want Competition?," Diskussionsschriften dp0604, Universitaet Bern, Departement Volkswirtschaft.
    15. Joseph Farrell & Michael L. Katz, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
    16. Stephen M. Maurer & Suzanne Scotchmer, 2006. "Open Source Software: The New Intellectual Property Paradigm," NBER Working Papers 12148, National Bureau of Economic Research, Inc.
    17. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    18. Ramon Casadesus-Masanell & David B. Yoffie, 2007. "Wintel: Cooperation and Conflict," Management Science, INFORMS, vol. 53(4), pages 584-598, April.
    19. Annabelle Gawer & Rebecca Henderson, 2007. "Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 1-34, March.
    20. Volker Nocke & Martin Peitz & Konrad Stahl, 2007. "Platform Ownership," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1130-1160, December.
    21. Miller, David A., 2008. "Invention under uncertainty and the threat of ex post entry," European Economic Review, Elsevier, vol. 52(3), pages 387-412, April.
    22. Randal Heeb, 2003. "Randal Heeb Innovation and Vertical Integration in Complementary Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 387-417, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thomas Le Texier & Mourad Zeroukhi, 2015. "How Can Proprietary Software Firms Take Advantage Over Open Source Communities? Another Story of Pro?fitable Piracy," Economics Working Paper Archive (University of Rennes & University of Caen) 201503, Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS.
    2. Kevin Boudreau, 2010. "Open Platform Strategies and Innovation: Granting Access vs. Devolving Control," Management Science, INFORMS, vol. 56(10), pages 1849-1872, October.
    3. Llanes, Gastón & de Elejalde, Ramiro, 2013. "Industry equilibrium with open-source and proprietary firms," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 36-49.
    4. Niedermayer, Andreas, 2015. "Does a Platform Monopolist Want Competition?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 523, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Halonen-Akatwijuka, Maija & Pafilis, Evagelos, 2020. "Common ownership of public goods," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 555-578.
    6. Atal Vidya & Shankar Kameshwari, 2015. "Developers’ Incentives and Open-Source Software Licensing: GPL vs BSD," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(3), pages 1381-1416, July.
    7. Niedermayer Andras, 2015. "Does a Platform Monopolist Want Competition?," Review of Network Economics, De Gruyter, vol. 14(1), pages 1-44, March.
    8. Tesoriere, Antonio & Balletta, Luigi, 2017. "A dynamic model of open source vs proprietary R&D," European Economic Review, Elsevier, vol. 94(C), pages 221-239.
    9. Gastón Llanes, 2019. "Competitive strategy for open and user innovation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(2), pages 280-297, April.
    10. Tobias Kretschmer & Aija Leiponen & Melissa Schilling & Gurneeta Vasudeva, 2022. "Platform ecosystems as meta‐organizations: Implications for platform strategies," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 405-424, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Peng Huang & Marco Ceccagnoli & Chris Forman & D.J. Wu, 2009. "Participation in a Platform Ecosystem: Appropriability, Competition, and Access to the Installed Base," Working Papers 09-14, NET Institute, revised Sep 2009.
    2. Burcu Tan & Edward G. Anderson, Jr. & Geoffrey G. Parker, 2020. "Platform Pricing and Investment to Drive Third-Party Value Creation in Two-Sided Networks," Information Systems Research, INFORMS, vol. 31(1), pages 217-239, March.
    3. Jabbour, Chady & Rey-Valette, Hélène & Maurel, Pierre & Salles, Jean-Michel, 2019. "Spatial data infrastructure management: A two-sided market approach for strategic reflections," International Journal of Information Management, Elsevier, vol. 45(C), pages 69-82.
    4. Kevin Boudreau, 2005. "The Boundaries of the Platform: Vertical Integration and Economic Incentives in Mobile Computing," Working Papers hal-00597767, HAL.
    5. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978, November.
    6. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    7. Patrick W. Schmitz, 2001. "Partial Privatization and Incomplete Contracts: The Proper Scope of Government Reconsidered," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 394-411, August.
    8. Jingtao Yi & Jinqiu He & Lihong Yang, 2019. "Platform heterogeneity, platform governance and complementors’ product performance: an empirical study of the mobile application industry," Frontiers of Business Research in China, Springer, vol. 13(1), pages 1-20, December.
    9. Jens Foerderer, 2020. "Interfirm Exchange and Innovation in Platform Ecosystems: Evidence from Apple’s Worldwide Developers Conference," Management Science, INFORMS, vol. 66(10), pages 4772-4787, October.
    10. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & David P. McIntyre & Arati Srinivasan, 2017. "Networks, platforms, and strategy: Emerging views and next steps," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 141-160, January.
    11. Pietro Ponti & Valeria Gattai & Piergiovanna Natale, 2023. "Grossman–Hart–Moore Goes to Italy: Rethinking the Boundaries of the Firm," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(3), pages 907-941, November.
    12. Peng Huang & Marco Ceccagnoli & Chris Forman & D. J. Wu, 2013. "Appropriability Mechanisms and the Platform Partnership Decision: Evidence from Enterprise Software," Management Science, INFORMS, vol. 59(1), pages 102-121, July.
    13. Annabelle Gawer & Rebecca Henderson, 2007. "Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 1-34, March.
    14. Kevin Boudreau, 2010. "Open Platform Strategies and Innovation: Granting Access vs. Devolving Control," Management Science, INFORMS, vol. 56(10), pages 1849-1872, October.
    15. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    16. Valeria Gattai & Piergiovanna Natale, 2014. "Joint Ventures and the Property Rights Theory of the Firm: a Review of the Literature," Working Papers 287, University of Milano-Bicocca, Department of Economics, revised Dec 2014.
    17. Valeria Gattai & Piergiovanna Natale, 2017. "A New Cinderella Story: Joint Ventures And The Property Rights Theory Of The Firm," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 281-302, February.
    18. Chi, Yunjia & Qing, Ping & Jin, Yong Jimmy & Yu, Jinjun & Dong, Maggie Chuoyan & Huang, Li, 2022. "Competition or spillover? Effects of platform-owner entry on provider commitment," Journal of Business Research, Elsevier, vol. 144(C), pages 627-636.
    19. Schmitz, Patrick W., 2021. "On the optimality of outsourcing when vertical integration can mitigate information asymmetries," Economics Letters, Elsevier, vol. 202(C).
    20. Andrei Hagiu & Julian Wright, 2015. "Marketplace or Reseller?," Management Science, INFORMS, vol. 61(1), pages 184-203, January.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ube:dpvwib:dp0707. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Franz Koelliker (email available below). General contact details of provider: https://edirc.repec.org/data/vwibech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.