Product Market Performance and Openness: The Moderating Role of Customer Heterogeneity

Abstract

Increasingly, a firm’s ability to create value depends on its ability to achieve alignment with its ecosystem of suppliers and complementors. In such contexts, a firm’s strategy may encompass “opening” some parts of their intellectual property (IP) to facilitate innovation, capturing value from other proprietary assets. Alternatively, I propose an information imperfections view of openness and complement innovations. I hypothesize complement innovations attract users with greater absorptive capacity. These users reduce uncertainty for other customers, affecting purchasing decisions. The strategic implications of openness thus depend on the existing levels of information imperfections: products in markets with high levels information imperfections benefit from openness, while products in markets with low levels of imperfections do not. I test these hypotheses on a unique dataset of wireless routers, complement innovations (open source custom firmware), and product reviews. I utilize an exogenous shock to complement innovations from several exogenous “reverse engineering” events. I find that the availability of complement innovations increases review ratings by 0.67 stars. I find a strong sorting effect: customers who are more likely to use the custom firmware are more likely to leave reviews and leave more positive reviews. I find evidence of a strong information effect as well: these users provide longer and more helpful reviews, especially in enterprise router markets with greater levels of information imperfections. Consistent with the information imperfections framework, I find that complement innovations were more beneficial for enterprise router products than for consumer routers.