Equilibrium Innovation Ecosystems: The Dark Side of Collaborating with Complementors

What is it about?

In this paper we provide a rationale for the recent burst in the amount of collaborative activities among firms selling complementary products, highlighting factors that may result in a lower profitability for such firms overall. To this end, we examine a game-theoretic model in which firms can collaborate with producers of complementary goods to enhance the quality of the systems formed by their components. Collaboration makes it cheaper to enhance such quality, so building innovation ecosystems results in firms investing more than if collaboration were impossible. In markets reaching saturation, firms are trapped in a prisoner’s dilemma: the greater investments create more value, but this does not translate into greater value capture because the value created relative to competitors does not change. We also examine the (dis)advantages for a firm of having open or closed interfaces for the component it sells when the environment is competitive as well as how this is related to the endogenous emergence of two-sided platforms

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Why is it important?

The main message of this paper is that a firm should have an integral view of its innovation efforts when building the ecosystem for its product(s). In particular, the firm should be aware that the firm’s competitors may be driven by the same incentives. A firm will strive to become a “platform leader”, but its competitors will certainly aim at platform leadership as well. Such competition for leadership can well be very destructive, as we have tried to argue. In our case, all firms have “platform potential” and they destroy rents in their quest to realize it: no firm emerges as a platform and the extensive collaboration they foster ends up backfiring. As far as we are aware, this is a novel aspect to the discourse on the formation of innovation ecosystems.