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We study competitive interaction between a profit-maximizing firm that sells software and complementary services, and a free open-source competitor. We examine the firm's choice of business model between the proprietary model (where all software modules are proprietary), the open-source model (where all modules are open source), and the mixed-source model (where some--but not all--modules are open). When a module is opened, users can access and improve the code, which increases quality and value creation. Opened modules, however, are available for others to use free of charge. We derive the set of possibly optimal business models when the modules of the firm and the open-source competitor are compatible (and thus can be combined) and incompatible, and show that (i) when the firm's modules are of high (low) quality, the firm is more open under incompatibility (compatibility) than under compatibility (incompatibility); (ii) firms are more likely to open substitute, rather than complementary, modules to existing open-source projects; and (iii) there may be no trade-off between value creation and value capture when comparing business models with different degrees of openness. This paper was accepted by Bruno Cassiman, business strategy.open source, user innovation, business models, complementarity, compatibility, value creation, value capture

Abstract. We present a model of standard setting and patent pool formation. We study the effects of alternative standard-setting and pool-formation rules on technology choice, prices and welfare. We find three main results. First, we show that allowing patent pools may reduce welfare when standards are negotiated and patent pools need to be ex-post incentive compatible. Second, we show that it is not possible to rank in welfare terms combinations of standardsetting and pool-formation rules when patent pools need to be ex-post incentive compatible. Third, we show that allowing firms to sign ex-ante agreements regarding pool participation dominates in terms of welfare any other policy rule. Our proposal does not require the Standard Setting Organization to have information on patent ownership, the terms of license agreements, or the value added of patents.

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Abstract. We present a dynamic model where the accumulation of patents generates an increasing number of claims on sequential innovation. We compare innovation activity under three regimes -patents, no-patents, and patent pools-and find that none of them can reach the first best. We find that the first best can be reached through a decentralized tax-subsidy mechanism, by which innovators receive a subsidy when they innovate, and are taxed with subsequent innovations. This finding implies that optimal transfers work in the exact opposite way as traditional patents. Finally, we consider patents of finite duration and determine the optimal patent length.