Abstract: Consider that a firm in charge of a business platform 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? Defining a business platform as an open standard together with  a default contract, we develop a sequential  innovation  model that addresses the tradeoffs 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 tools of Cobb-Douglas production to derive our results. These findings can inform innovation strategy, choice of organizational form, IP non-compete decisions, and regulation policy.

Bio: Geoffrey Parker is Professor of management science at Tulane University in the A. B. Freeman School of Business and is a Research Scientist at the MIT Sloan School’s Center for Digital Business.  He serves as Director of the Tulane Energy Institute and President of the Industry Studies Association. He also serves on the General Electric (GE) Africa technical workforce advisory board. He received a B.S. in electrical engineering and computer science from Princeton University, M.S. in electrical engineering (Technology and Policy Program) from the Massachusetts Institute of Technology (MIT), and Ph.D. in management science from MIT. He has recently worked with firms such as AT&T, Cellular South, GE, Haier, IBM, International Postal Corporation, Microsoft, Mindtree, SAP, Thomson Reuters, and the United States Postal Service.  Parker has made significant contributions to the field of network economics and strategy as co-developer of the theory of “two-sided” markets. His current research includes studies of distributed innovation, business platform strategy, and systems to integrate renewable energy. Parker’s research has been funded by grants from the National Science Foundation, the Department of Energy, and multiple corporations.  He serves or has served as associate editor at multiple journals and as a National Science Foundation panelist. Before attending MIT, he held positions in engineering and finance at GE Semiconductor in North Carolina and at GE Healthcare in Wisconsin. Additional information can be found at platformeconomics.org, ggparker.net and @g2parker.