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

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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 splitWhat 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