Free-contested markets

When an innovation is diffused for free to consumers via the free innovation paradigm and is a full or partial substitute for a product diffused by producers, producers face what Gambardella, Raasch, and von Hippel (2016) term a free-contested market. Free-contested markets involve a source of competition for producers that has not been contemplated in standard models of monopolistic or imperfect competition (see, e.g., Robinson 1933; Chamberlain 1962).

In a free-contested market, consumers as a group benefit from having access to the additional, non-market choice of free innovations and innovation designs. Some consequences of this situation have been studied in the case of competition among open source and closed source software suppliers (Casadesus-Masanell and Ghemawat 2006; Economides and Katsamakas 2006; Sen 2007). In that context, producers were found to lose profit from open source innovations distributed for free, even if those innovations were not full substitutes for producer commercial products. It was also found that consumers benefit from the existence of the open source alternative unless it forces proprietary firms to exit the market, leaving free, partial substitutes as consumers' only option. Loss of the producer option reduces the benefit to consumers because the two alternatives typically are not perfect substi- tutes—some consumers will prefer one and some the other (Kuan 2001; Baldwin and Clark 2006b; Casadesus-Masanell and Ghemawat 2006; Lin 2008).

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