Platforms, Markets and Innovation

Platforms, Markets and Innovation

Edited by Annabelle Gawer

Annabelle Gawer presents cutting-edge contributions from 24 top international scholars from 19 universities across Europe, the USA and Asia, from the disciplines of strategy, economics, innovation, organization studies and knowledge management. The novel insights assembled in this volume constitute a fundamental step towards an empirically based, nuanced understanding of the nature of platforms and the implications they hold for the evolution of industrial innovation. The book provides an overview of platforms and discusses governance, management, design and knowledge issues.

Chapter 7: Platform Rules: Multi-Sided Platforms as Regulators

Kevin J. Boudreau and Andrei Hagiu

Subjects: business and management, strategic management, economics and finance, economics of innovation, industrial organisation, services, innovation and technology, economics of innovation

Extract

7. Platform rules: multi-sided platforms as regulators Kevin J. Boudreau and Andrei Hagiu1 INTRODUCTION In 1983, the videogame market in the USA collapsed, leading to bankruptcy for more than 90 percent of game developers, as well as Atari, manufacturer of the dominant game console at the time. The main reason was a ‘lemons’ market failure: because it had not developed a technology for locking out unauthorized games, Atari was unable to prevent the entry of opportunistic developers, who flooded the market with poor-quality games. At a time when consumers had few ways to distinguish good from bad games, bad games drove out good ones. The videogame market was resurrected six years later only when Nintendo entered with a set of draconian policies to regulate third-party developers more tightly. Central to Nintendo’s strategy was the use of a security chip designed to lock out any game not directly approved by Nintendo. Twenty-five years later, in the summer of 2008, Apple launched the iPhone store (a digital store of third-party applications for its immensely popular iPhone) at a time when lemons problems had become less of an issue, with widely available reviews and ratings available on the Internet. Even so, Apple reserved the right to verify and exclude any third-party application it did not deem appropriate. And it exerted that right swiftly by taking down an application named ‘I Am Rich’, which cost $999 (the maximum price allowed by Apple), while doing nothing more than presenting a glowing ruby on the buyer’s...

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