Interactions between the paradigms
There are four important interactions between the free innovation paradigm and the producer innovation paradigm (Gambardella, Raasch, and von Hippel 2016).
First, identical or closely substituting innovation designs can be made available to potential adopters via both paradigms at the same time. For example, Apache open source Web server software is offered free peer to peer by the Apache development community and at the same time a close substitute is offered commercially by Microsoft. In such cases, peer-to-peer diffusion via the free innovation paradigm can compete with products and services that producers are selling on the market. The level of competition can be substantial. In the specific case just mentioned, 38 percent of Internet websites used Apache free Web server software in 2015. Microsoft was second, serving 28 percent of sites with its commercial server software (Netcraft.com 2015). Competition from substitutes diffused for free via peer-to-peer transfers can increase social welfare by forcing producers to lower prices. It can also drive producers to other forms of competitive responses with social value, such as improving quality or increasing investments in innovation development.
Second, innovations available for free via the free innovation paradigm can complement innovations diffused via the producer innovation paradigm. Free complements are very valuable to consumers as well as to producers. They enable producers to focus on selling commercially viable products, while free innovators fill in with designs for valuable or even essential complements. For example, a specialized mountain bike is of little value to a biker who has not learned specialized mountain biking techniques. Producers find it viable to produce and sell the specialized mountain bikes as commercial products, but largely rely on expert bikers innovating within the free paradigm to create and diffuse riding techniques as a free complement. That is, adopters generally learn new mountain biking techniques by a combination of self-practice and informal instruction freely given by more expert peers.
Third, we see from the vertical, downward-pointing arrow toward the right in figure 1.1 that a design developed by a free innovator may spill over to a producer and become the basis for a valuable commercial product. For example, the design of the mountain bike itself and many further improvements to it were developed by free innovator bikers. These designs were not protected by the free innovator developers, and were adopted for free by bike producing firms (Penning 1998; Buenstorf 2003). As we will see, adoption of free innovators' designs can greatly lower producers' in-house development costs (Baldwin, Hienerth, and von Hippel 2006; Franke and Shah 2003; Jeppesen and Frederiksen 2006; Lettl, Herstatt, and Gemuenden 2006).
Fourth and finally, we see from the vertical, upward-pointing arrow at the left of figure 1.1 that producers also supply valuable information and support to free innovators. For example, Valve Corporation, a video game development firm, offers Steam Workshop, a company-sponsored website designed to support innovation by gamers (Steam Workshop 2016). The site contains tools that make it easier for these individuals to develop their own game modifications and improvements and to share them with other players. Investments to support free design, such as the investment in Steam Workshop by Valve, can benefit producers by increasing the supply of commercially valuable designs that free innovators create (Gambardella, Raasch, and von Hippel 2016; Jeppesen and Frederiksen 2006; von Hippel and Finkelstein 1979).