Strategic Intellectual Property Sharing: Competition on an Open Technology Platform Under Network Effects

Abstract

In this paper, we explore the strategic decision of an incumbent to open a proprietary technology platform in order to allow same-side co-opetition in a market characterized by network effects. We propose a novel model that, to the best of our knowledge, is the first attempt to analytically conceptualize in this context the interplay among the degree of same-side platform openness, the absorptive capacity of the entrant, and the intensity of network effects. Our analysis uncovers interesting and non-trivial results. First, when quality is exogenous for the entrant, we find that if the intensity of network effects is very strong then the incumbent prefers to close the technology. Moreover, we discuss various interesting open-platform co-opetition outcomes that arise in parallel with a full market coverage. When the entrant chooses the quality level and the incumbent is strategic in its platform opening decision, we find that intense network effects make new players shun the market so IP-sharing is not possible in equilibrium. When the network effects are of intermediate intensity, the incumbent opens the technology to the entrants who possess a sufficiently high absorptive capacity, calibrating the amount of sharing to the entrant's absorptive capacity level to ensure that the duopoly setting is mutually beneficial. In an extension, we also explore the ability of the incumbent to engineer the strength of network effects in the market. When the incumbent finds it optimal to open its core technology, we observe non-trivial alternating-monotonicity patterns for the intensity of network effects with respect to the entrant's absorptive capacity, revealing complex interplay dynamics between the entrant's cost to join the market and the value of the network to the users. Moreover, we show that a model with exogenous network effects could drastically underestimate the range of entrants' absorptive capacity values for which the incumbent should open its platform. This may lead to sub-optimal blocking of certain firms from the market, causing the incumbent to miss out on valuable co-opetition opportunities.