Open innovation in platform competition

Abstract

We examine the competition between a proprietary platform and an open platform, where each platform holds a two-sided market consisted of app developers and users. The open platform cultivates an innovative environment by inviting public efforts to develop the platform itself and permitting distribution of apps outside of its own app market; the proprietary platform restricts apps sales solely within its app market. We use a game theoretic model to capture this competitive phenomenon and analyze the impact of growth of the open source community on the platform competition. We found that growth of the open community mitigates the platform rivalry, and balances the developer network sizes on the two platforms. The platforms' relative dominance is found to be a key determining factor in the effect of open community growth in equilibrium. Furthermore, total surplus on the open platform and total welfare of the two platforms both increase as the open community grows.