Transaction costs

If producer innovators have a production cost advantage for some (but not all) production technologies, single and collaborative free innovators have an advantage with respect to costs for compensated transactions. By definition, they have none.

Consider that the ordinarily assumed transaction costs of innovation include the cost of establishing exclusive rights over the innovative design—for example, through secrecy or by obtaining a patent. Also included are the costs of protecting the design from theft—for example, by restricting access or by enforcing non-compete agreements (Teece 2000; Marx, Strumsky, and Fleming 2009). Finally, the costs of selling and receiving payment and the costs of protecting both sides against opportunism also are included in transaction costs and may be substantial. These may involve the cost of bargaining and writing contracts (Hart 1995), plus costs of accounting for transfers and compensation, and finally the costs of policing and enforcing agreements made (Williamson 1985).

Producer innovators must incur these transaction costs. By definition, they obtain revenue and resources from compensated exchanges with customers, employees, suppliers, and investors. A considerable amount of analysis in the fields of economics, management, and strategy considers how to minimize transaction costs by rearranging the boundaries of firms or the structure of products and processes. (For reviews of this literature, see Williamson 2000 and Lafontaine and Slade 2007.) For producer innovators, transaction costs are an inevitable cost of doing business.

Individual free innovators do not incur transaction costs. By definition they do not protect their innovation designs. Collaborative free innovation projects also do not sell products, nor do they pay members for their contributions. Transaction costs can creep in, of course, if individuals or groups decide not to fully relinquish claims on their intellectual property rights. For example, open source software projects generally assert a copyright over the software code created by their projects, doing so in order to preserve open access rather than limit it. The General Public License (GPL), based on copyright law, was explicitly designed to protect the rights of all to view, modify, and distribute open source software code bearing that license (Stallman 2002; O'Mahony 2003). The costs of enforcing the GPL are like classic transaction costs in that they assert and enforce property rights. Notwithstanding this minor exception, it is clear that free-revealing single free innovators and open collaborative innovation projects have a transaction cost advantage over producer innovators.

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