Gastón Llanes

Mixed Source

We study competitive interaction between a profit-maximizing firm that sells software and complementary services, and a free open-source competitor. We examine the firms 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 firms 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.

Competitive strategy for open and user innovation: LLANES

I study the incentives to open technologies in imperfectly competitive markets with user innovation. Firms may choose to open part of their knowledge or private information so that it becomes freely accessible to users. Openness decisions are governed by a trade‐off between collaboration and appropriability: by becoming more open, a firm encourages user innovation but hampers its ability to capture value. I find that large firms are less open and invest more in product development than small firms, and that firms react to greater openness from rivals by becoming more open. I also show that compatibility and spillovers have a negative effect on openness, and that firms become more open as the number of competitors increases.

Cooperation dynamics in repeated games of adverse selection

We study repeated games with Markovian private information and characterize op- timal equilibria as players become arbitrarily patient. We show that seemingly non-cooperative actions may occur in equilibrium and serve as signals of changes in private information. Play- ers forgive such actions, and use the information they convey to adjust their continuation play. However, to forgive is not to forget: players keep track of the number of aggressions and enter into a punishment phase if that number becomes suspiciously high. Our model explains features of long-run relationships that are only barely understood, such as equilibrium defaults, unilateral price cuts, collusive price leadership, graduated sanctions, and restitutions. We also explore a model in which interactions are frequent and show how increasing the persistence of the process of types reduces informational frictions.

Entry into complementary good markets with network effects

We study whether complementarities can help a firm enter a market with strong network effects and incumbency advantages. We find that bundling the network good with a complementary good, or using the network good as a loss leader (i.e., pricing below marginal cost) can facilitate entry, but that these strategies involve costs that may render them undesirable for the entrant. We also find that the entrant always prefers to make the complementarity general (so that the incumbent benefits from it as well) over having a firm-specific complementarity and using a loss leading strategy. Pricing and product design strategies are interdependent: bundling (unbundled pricing) should be used if and only if the complementarity is specific (general). Finally, we find that bundling may be socially optimal because it allows entrants to challenge incumbents in markets with network effects, thereby expanding the complementary benefits enjoyed by consumers. This finding contrasts wit the standard view of regulators, who see bundling as a way to foreclose entry and prevent competition, as in the recent case of the European Commission vs. Google.