Challenges of open innovation: the paradox of firm investment in open-source software

Open innovation is a powerful framework encompassing the generation, capture, and employment of intellectual property at the firm level. We identify three fundamental challenges for firms in applying the concept of open innovation: finding creative ways to exploit internal innovation, incorporating external innovation into internal development, and motivating outsiders to supply an ongoing stream of external innovations. This latter challenge involves a paradox, why would firms spend money on R&D efforts if the results of these efforts are available to rival firms? To explore these challenges, we examine the activity of firms in open‐source software to support their innovation strategies. Firms involved in open‐source software often make investments that will be shared with real and potential rivals. We identify four strategies firms employ – pooled R&D/product development, spinouts, selling complements and attracting donated complements – and discuss how they address the three key challenges of open innovation. We conclude with suggestions for how similar strategies may apply in other industries and offer some possible avenues for future research on open innovation.     

Option Coskewness and Capital Asset Pricing

This article shows how the market coskewness model of Rubinstein(1973) and Kraus and Litzenberger (1976) is altered when a nonredundantcall option is optimally traded. Owing to the option’snonredundancy, the economy’s stochastic discount factor(SDF) depends not only on the market return and the square ofthe market return but also on the option return, the squareof the option return, and the product of the market and optionreturns. This leads to an asset pricing model in which the expectedreturn on any risky asset depends explicitly on the asset’scoskewness with option returns. The empirical results show thatthe option coskewness model outperforms several competing benchmarkmodels. Furthermore, option coskewness captures some of thesame risks as the Fama–French factors small minus big(SMB) and high minus low (HML). These results suggest that thefactors that drive the pricing of nonredundant options are alsoimportant for pricing risky equities.(JEL G11, G12, D61)     

Analyzing the standard deduction as a presumptive tax

Presumptive taxes can be found in the tax system of most developing countries and make sense when the desired tax base is difficult to measure, verify, and monitor. As a substitute for the desired tax base, the presumed tax base is derived from items that can be more readily monitored. Presumed taxes can also be found in developed countries, and examples include fixed depreciation schedules in place of asset-specific measures of decline in asset value, floors on deductible expenses, and the standard deduction. The authors analyze presumptive income taxation with an ultimate goal to initiate an approach to optimal presumptive taxation. This paper begins that task by analyzing the standard deduction in the individual income tax system in the United States.     

Dynamics of dyadic competitive interaction

In this study of firms’ entries into and exits from each other’s markets, we link research on multipoint competition to the emerging action‐oriented, dyadic approach to interfirm rivalry by specifying market interdependencies between pairs of firms that condition their potential for rivalry over time. Our dynamic analysis of competitive interactions between pairs of commuter airlines in California reveals the idiosyncratic and asymmetric market microstructures that characterize dyadic competitive relationships and helps explain why firms grapple vigorously with some of their competitors while being passive toward others. We show that there is an inverted U‐shaped relationship between firms’ rates of entry into and exit from each other’s markets and the level of multimarket contact in competitor dyads. We also show how this basic curvilinear effect varies from dyad to dyad as a function of relative levels of multimarket contact with competitors in other dyads and the relative sizes of competitors in a focal dyad. Copyright © 1999 John Wiley & Sons, Ltd.     

ReGale: Some memorable results

This article reviews, with admiration and awe, the scientific contributions of David Gale.