Faculty and Research

We study how a commercial firm competes with a free open source product. The market consists of two customer segments with different preferences and is characterized by positive network effects. The commercial firm makes product and pricing decisions to maximize its profit. The open source developers make product decisions to maximize the weighted sum of the segments' consumer surplus, in addition to their intrinsic motivation. The more importance open source developers attach to consumer surplus, the more effort they put into developing software features. Even if consumers do not end up adopting the open source product, it can act as a credible threat to the commercial firm, forcing the firm to lower its prices. If the open source developers' intrinsic motivation is high enough, they will develop software regardless of eventual market dynamics. If the open source product is available first, all participants are better off when the commercial and open source products are compatible. However, if the commercial firm can enter the market first, it can increase its profits and gain market share by being incompatible with its open source competitor, even if customers can later switch at zero cost. This first-mover advantage does not arise because users are locked in, but because the commercial firm deploys a divide and conquer strategy to attract early adopters and exploit late adopters. To capitalize on its first-mover advantage, the commercial firm must increase its development investment to improve its product features.
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This paper studies how the conversion of a waste stream into a useful and saleable by-product affects a firm's optimal operating strategy. We determine whether local implementation can be optimal, i.e., continuing business-as-usual to produce the original product and merely converting the collaterally generated waste stream into by-product, or whether global implementation - that re-optimizes the now joint production process - is required to maximize profit. Whereas local BPS implementation can be managed as if it were an alternate method of waste disposal, global implementation requires managerial attention at a strategic level. To determine which implementation mode is profit-maximizing, we derive optimality conditions for three possible operating regimes. These optimality conditions depend crucially on the waste disposal cost, which acts as a subsidy for the by-product that "consumes" the waste, and also on the virgin raw material cost, which acts as a subsidy for the original product that "feeds" the by-product process. These two costs create a symbiotic relationship between the original product and by-product. Since BPS turns waste into useful raw material, the firm may increase profit by generating more "waste". Although BPS is generally lauded as a win-win for business and the environment, the firm may actually increase emissions if it acts to maximize profit because it increases production to leverage the competitive advantage it gains from its operational synergy.

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We use an economic model to study the optimal management of know-how, defined here as employee-generated information about the performance of specific solutions to problems that may or will recur in the future. We derive three main results. First, information about successes is typically more useful than information about failures, since successful methods can be replicated while failures can only be avoided. This supports firms' focus on 'best practice'. Second, recording mediocre know- how can actually be counter-productive, since such mediocre know-how may inefficiently reduce employees' incentives to experiment. This is a strong-form competency trap. Third, the firms that gain most from a formal knowledge system are also the ones that should be most selective when encoding information (i.e., the ones that are most at risk from the competency trap); namely, large firms that repeatedly face problems about which there is little general knowledge and that have high turnover among their employees. Beyond these main principles, we also show that it may be optimal to disseminate know-how on a plant-level but not on a firm-level, and that storing back-up solutions is most valuable at medium levels of environmental change.

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