Technische Universität München Open and User Innovation Workshop, Harvard Business School July 30,...

Technische Universität München

Open and User Innovation Workshop, Harvard Business School

July 30, 2014

Joachim Henkel, Alexander Hoffmann

Value capture

in hierarchically organized industries:

The role of open source inputs

Joachim Henkel, Alexander Hoffmann |

Nokia 770: Open source inputs

*Source: A. Jaaksi, presentation to LinuxWorld 2006 2

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Who appropriates the value

that open source inputs contribute

to complex, hierarchical systems?

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A hierarchically organized industry

OEM

2nd tier suppliers

1st tier suppliers

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Negotiations

The value split between industry participants is determined in negotiations.

Each 1st tier suppliernegotiates with its

2nd tier suppliers

OEM negotiates with1st tier suppliers

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Bargaining structure and value split

We show: Bargaining structure – who negotiates with whom – affects how the value is split.

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Model approach:

Hierarchical Shapley Value

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Hierarchical Shapley Value (1/3)

▪ Idea:

– Value split between level-1 (L1) modules according to Shapley Value

– Value split within a given L1 module acc. to (modified) SV, assuming all other L1 modules are complete and present (reflects limited information)

– Similar to Owen Value (1977), but different in important respect

L1 modules

L2 modules

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▪ Set of L1 modules: , where , disjoint, and

▪ Level-1 value distribution among L1 modules:

– Induced characteristic function represents value of (complete) L1 modules and their unifications:

– L1 Shapley value distribution:

Hierarchical Shapley Value (2/3)

�̂� :2𝔅→ℝ , �̂� ( 𝐽 ) :=𝑣 (¿𝑀 𝑖∈ 𝐽𝑀 𝑖 )

𝜙𝑀 𝑖

❑ (�̂� )≔ ∑𝑆⊆𝔅¿𝑀𝑖 }

|𝑆|! (𝑘−∨𝑆∨−1 )!𝑘!

( �̂� (𝑆∪𝑀 𝑖 )−�̂� (𝑆 ))

for

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▪ Level-2 value distribution among modules within

– L2 modules assume presence of all other L1 modules

– Induced characteristic function ():

– L2 Shapley Value distribution within an L1 module:

Hierarchical Shapley Value (3/3)

~𝑣𝑀 𝑖( 𝐽 ):=

(𝑣 ( 𝐽∪ (𝑀 {𝑀 ¿¿ 𝑖))−𝑣 (𝑀 {𝑀¿¿ 𝑖 ) )𝑣 (𝑀 )−𝑣 (𝑀 {𝑀¿¿ 𝑖)

𝜙𝑀𝑖

❑ (�̂� )

𝜙𝑚 𝑗

𝐻𝑆𝑉 (𝑣 )≔𝜙𝑚 𝑗

❑ (~𝑣𝑀𝑖 ):= ∑𝑆⊆𝑀 𝑖 {{𝑚 𝑗

}¿|𝑆|! (¿ 𝑀𝑖∨−|𝑆|−1 ) !

¿𝑀 𝑖∨!(~𝑣𝑀𝑖

(𝑆∪{𝑚 𝑗 })−~𝑣𝑀𝑖(𝑆 ))

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Open Source Inputs

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OSS modules and value split

What if one of the “participants” is an open source module?

Contributes to value creation But: does not claim any value Who appropriates the value contributed by the OSS module?

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Open source (OSS) modules

Assumptions:

▪ Contributors to the same subsystem as the OSS module are aware of it and use it in their negotiations

▪ Contributors to other subsystems as the OSS module, or higher levels, are not aware of it and do not use it in their negotiation

– “Information hiding” function of modularity (Baldwin and Clark, 2000)

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Results (1/2)

System

A B&OSS

B OSS

System

A B OSS

Value function , , , ,

, , ,

Since OSS is freely available, we assume that both A and B us it in their value proposition.

B’s value capture acc. to Shapley:

Hierarchical Shapley value:

Split on 2nd level, within “B&OSS”: trivial, all value to B

Split on 1st level: B captures…

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Results (2/2)

System

A B&OSS

B OSS

System

A B OSS

Through clustering with OSS module, B gains:

,

where denotes the “complementarity gains” of putting A and the OSS module together

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Conclusions

▪ It is beneficial for firm B to be clustered with the OSS module (compared to a situation where A, B, and the OSS module are all on the top level)

▪ How much B benefits from clustering, depends…

– on the complementarity between A and the OSS module

– but not on the complementarity between B and the OSS module

▪ Logic:

– Complementarity between B and OSS module benefits B in any case

– The stronger the complementarity between A and OSS module, the more of the value added by OSS (incl. the complementarity gain) is claimed by A in case of no hierarchy, making hierarchy more attractive for B

▪ Generalization of results to larger systems possible

▪ Results extend literature (e.g., Lerner & Tirole 2002, West & Gallagher 2006) showing that complementary products are a way to benefit from OSS

Thanks