Sustainable competitive advantage of a system goods innovator in a market with network effects and entry threats

Abstract

An innovator (a firm) introducing a technology for system goods into a market with network effects can adopt various licensing strategies. The innovator's strategy spectrum could include being a monopolist for an entire system using a proprietary technology, for only a set of components, or for one of the firms in a competitive market by licensing (opening) all of its technology to others firms. Regarding the choice of these strategic options, two conflicting schools of thought have emerged: network effects theory and leverage theory. Although the former encourages the innovator to completely reveal or open its technology in order to benefit from increased compatibility, the latter recommends the innovator to strictly withhold and protect its proprietary technology in order to avoid future competition. A few historical examples, such as the PC platform competition of IBM and Apple, suggest that neither of these extreme measures lead to business success. Therefore, a model has been developed in order to integrate these two perspectives. Our results suggest that while network effects encourage firms to open technology to a limited extent, they should strictly protect their "core" technological competency in order to minimize future competition. (C) 2011 Elsevier B.V. All rights reserved.