Abstract
If innovation prizes are not the solution, how can Arrow’s paradox be solved? In some niches such as the movie industry or venture capital, trading ideas is somewhat possible. Identifying the underlying principles can help draw up a solution to make trading possible in general. Trust and fairness between the partners are essential. Research has made significant progress in analysing and finding mechanisms to support both. Establishing a reputation mechanism and norms of fairness are the most promising elements to make cooperative innovation a reality.
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Notes
- 1.
See the example of Disney (in Rigby and Zook 2002, p. 86–87: “when Disney decided to seek ideas from the outside, it got hit with some eye-popping lawsuits. In August 2000, a jury awarded $240 million to All Pro Sports Camps, which had accused Disney of entertaining then stealing its ideas for a sports-themed entertainment complex. That kind of legal threat, which resulted from Disney’s ad hoc approach to the situation, can lead to protocols that discourage employees from even listening to proposals from outsiders.”)
- 2.
The most striking analysis that hints at a more general solution as suggested in the following is surely Shane and Cable (2002). Here the emphasis in on social ties, both direct and indirect and the role of reputation. This study however does not go further to identify a more general principle. It rather builds on the proximity and use of close social ties for information.
- 3.
See Desny v. Wilder, 299 P. 2d 257 – Cal: Supreme Court 1956: Gunther-Wahl Productions, Inc. v. Mattel, Inc., 128 Cal. Rptr. 2d 50 – Cal: Court of Appeals, 2nd Appellate Dist., 8th Div. 2002; Grosso v. Miramax Film Corp., 383 F. 3d 965 – Court of Appeals, 9th Circuit 2004; Montz v. Pilgrim Films & Television, Inc., 606 F.3d 1153, 1158 – Court of Appeals, 9th Circuit 2011.
- 4.
- 5.
This was in 2009. It has since changed. It still reads “Could your innovation be the next game-changer?”, but the enthusiasm has faded and it offers: “Is there a new product you’d like to see, or a change to an existing one? Our Consumer Relations Team welcomes your input and is happy to answer product questions.” “If you are the owner or representative of an innovation that might help improve the lives of consumers, this site can help you submit your innovation for review by our Connect + Develop Team.” (ipgconnectdevelop.com/home/home.html 02.03.2013)
- 6.
Huston and Sakkab (2006, p. 61) – as opposed to 10 % in 2000.
- 7.
- 8.
See pgconnectdevelop.com (02.03.2013). Other sources complement this number:
“•P&G works proactively with more than 85 network and 120+ universities. Seventy five percent of their searches within these networks result in viable leads.
•P&G’s “open door” for unsolicited innovation submissions – Connect + Develop – generated nearly 4,000 leads last year. The site is now available in 5 languages (English, Chinese, Japanese, Portuguese, and Spanish).
•P&G invests in relationships over time to become the preferred partner for open innovation. Forty percent of their relationships results in repeat deals.
•More than 50 % innovation is sourced externally (up from < 10 % in 2001).”
15inno.com/2010/06/02/criticalfactslessons/ (02.03.2013, originally published June 2, 2010)
- 9.
Huston and Sakkab (2006, p. 61)
- 10.
For example Merck (see anrpt2000.com/innovation2.htm 02.03.2013, also see Chesbrough 2006a, p. 53).
- 11.
Huston and Sakkab (2006, p. 66)
- 12.
Also see Sakkab (2007)
- 13.
“For your protection and ours, we may decline to review your submission if it appears to lack intellectual property protection.” pgconnectdevelop.com/home/frequently_asked_questions/about-submitting-to-pg.html (02.03.2013) and further: “Idea submission guidelines now read: “Innovations should also include protectable intellectual property, typically in the form of a granted patent or published patent application … Please do not submit the following: Innovations which you do not own or have the legal right to represent, or about which you are unable to provide information on a nonconfidential basis. … Ideas, suggestions or thoughts that do not include protectable intellectual property.” pgconnectdevelop.com/home/submission_criteria.html (02.03.2013)
- 14.
For example, Vileda (vileda.co.uk/uk/innovations 02.03.2013) who appear suspiciously similar to the early stages of Connect and Develop, using very similar language and tone.
- 15.
- 16.
Interestingly enough Kenneth Arrow drew a very similar conclusion, but failed to connect it in a specific setting of information, of ideas (see Arrow 1972, p. 367).
- 17.
Also see discussion on credence goods. For an overview, see Dulleck and Kerschbamer (2006).
- 18.
As Arrow put it: “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence;” Arrow (1972, p. 367)
- 19.
- 20.
For a general example on this see Atanasov et al. (2008).
- 21.
See, for example, Bakos and Dellarocas (2005), Dellarocas (2003, 2005, 2006, 2007), Ba and Pavlou (2002), Resnick and Zeckhauser (2002), Melnik and Alm (2002). Also Güth and Kliemt (2004), Bolton et al. (2004), Brennan and Petti (2004), Hardin (2004), Pettit (2004), McGeer (2004), Bierhoff and Vornefeld (2004).
- 22.
See, for example, the Rating and Review Professional Association (rarpa.org).
- 23.
Bolton and Ockenfels (2009, p. 16)
- 24.
The Daily Beast (2011)
- 25.
- 26.
A good example, especially in the current setting is defaulting on government bonds. A country failing to repay their bonds now faces severe penalty in the future through higher interest rates for often a considerable time and scope, putting often a hefty fine on default, by far outweighing the initial gain. See for example Zivney and Marcus (1989).
- 27.
- 28.
- 29.
This is not that simplistic, as many other factors need to be taken into account, discount rates, risk of failure, opportunity costs, etc.
- 30.
Again, it is not that simplistic. Consider the argument made in part one where companies become implementers and the innovation markup will be competed away more and more and remain with the idea rather than the implementer. Then also the incentive to default becomes larger. This may complicate the argument and require some form of modification, if at all, but the principle still holds.
- 31.
Another argument that has been put forward in this context is the notion of sunk costs to build reputation (see Hellmann and Perotti 2011, also Kreps, 1990). First you have to build up a reputation to be considered a trustworthy partner. You have to do some simple things first. Maybe advertise, demonstrate you are investing money in your reputation. These sunk costs may deter you from defaulting to some extent. If the projects you are working on offer a smaller additional return on stealing the ideas than your reputation is worth there would be no incentive to steal. In any case, even where this is not the case, such sunk costs reduce the payoff of stealing as they would then be lost.
- 32.
As small tribute to Merrill Flood (and Melvin Drescher) as well as Albert W. Tucker. In a more formal setting, the example could be interpreted as a prisoner’s dilemma: not only Albert could cheat Merrill, but also the other way around. Merrill could use Albert’s help to realise the idea and then exclude him from the profit (a less likely scenario, and more easy to remedy by legal provisions). Risk of deviation seems to be greater with the one realising than having the idea. Merrill needs someone to realise the idea, or he would not have cooperated with Albert in the first place. Once he reveals the idea to Albert, Albert could still realise the Idea, while Merrill would probably have a more difficult time (lacking the required skills, Albert’s first mover advantage, etc.). Hence, the risk of defection is stronger on the side of the realisation partner than the one having the idea. But by no means exclusive. Merrill may offer the idea to several partners at once, and see who realises it quickest and to greatest advantage – thus Albert would invest in realising it and plan with it, realising only later a competitor has beaten him to it.
- 33.
See The Economist 2010c.
- 34.
In fact the mechanism could indeed be strengthened, and the punishment of defection increased by destroying the actual value of the idea ex post. If someone steals the idea, instead of letting him/her walk away and actually profiting from it, the other party could reveal the idea publically or at least to competitors, often severely mitigating the potential payoff of such an idea. The one stealing would thus be left with less, possibly even less than in the case of continued cooperation. This rests on well-established analysis especially by Anton and Yao (1994, 2004, 2005). Indeed if it were possible (though it may strongly vary with the nature of the idea, the relative position of the partners, etc. not least also possibly the fact that the one with ideas would have likely chosen the one best to realize the idea, and revealing it, only ex post would not mitigate its value too much) this would alter the analysis somewhat. It certainly would strengthen any such reputation mechanism. It may even sometimes be a mechanism in its own right. But it is not general, nor is it without severe drawbacks. It raises a number of additional questions and concerns.
- 35.
The intuition is much more complex and the analysis highly technical, especially when considering uncertain payoffs, variable length and intensities of cooperation, etc. The basic insight still holds though. A variety of strategies could be thought out of how to maximise the disincentive to defect and/or increase the return for either side also in a continuous cooperation between just the two. The effectiveness will depend on the commitment and credibility of threat of any such strategy and the dynamics it will entail. For an introduction and overview, see Mailath and Samuelson (2006). More accessible see Axelrod (1984), and (1997). Also see Schelling (1960).
- 36.
See especially Bolton and Ockenfels (2009) on the discussion of perfect reputation systems and the various issues.
- 37.
“Economists have long recognized reputation as an effective means of enforcing cooperation when an institution exists to track and disseminate such information (e.g., credit agencies; Milgrom et al. 1990), or within a small group where people are intimately familiar with of one another’s history (Fudenberg and Maskin 1986). In contrast, the effectiveness of reputation in circumstances where players are essentially strangers, knowing about one another only through word-of-mouth, is far less certain.” Bolton et al. (2005, p.1458) (for the references see: Milgrom et al. 1990; Fudenberg, and Maskin 1986).
- 38.
Many variations in the game exist (rationality constraints, forgiveness, payoff size, communication, etc.) and special aspects apply in the current case (variable payoff, payoff size, uncertainly of payoff, etc.). (See Mailath and Samuelson 2006. As a small sample also see Klein and Leffler 1981; Shapiro 1983; Kreps et al. 1982; Kreps and Wilson 1982; Benoit and Krishna 1985; Habourian 1990; Bendor et al. 1991; Milgrom et al. 1990; Smale 1980; Fudenberg and Maskin 1986; Fudenberg et al. 1998; Compte 1998; Kandori and Matsushima 1998; Cripps et al. 2004; Bolton et al. 2005; Bolton and Ockenfels 2009). Though backward induction seems a logical problem in finite games, due to the nature of the game (infinite participants, variable ends, and behavioural components) this seems to apply only with severe caution (see, for example, Selten and Stocker 1986; Pettit and Sugden 1989; Aumann 1995; Dow and da Costa Werlang 2008). Many complementary experiments amend these findings (see especially trust games: Berg et al. 1995; Ostrom and Walker 2003. Also Wilson and Eckel 2006).
- 39.
At worst, one may choose to act on the reputation as punishment and/or to simply uphold the effectiveness of the deterrence mechanism.
- 40.
- 41.
See Chicago Magazine (2012). Also see threadless.com (02.03.2013). For more details, also see Forbes (2010); also Howe (2006); also see Brabham (2010).
- 42.
- 43.
Franke et al. (2012, p. 5)
- 44.
On a much smaller scale – modification rather than idea sharing – this has also been identified as a business opportunity to allow customers to participate in the process, typically by customizing the product to some extent. This would raise their utility and customers would be more willing to pay higher prices. In areas with high heterogeneity of need this promises to hold significant value added (e.g. von Hippel and Katz 2002, Franke and von Hippel 2003).
- 45.
See Franke et al. (2012)
- 46.
You may debate whether this is truly an ‘idea’ or not. Generally it is. Innovative – maybe. Think of any other high-tech example if this is more comfortable. The point here is rather: You spotted the profit opportunity. Someone else reaped the benefit.
- 47.
It would be a mistake to think of a reward only in terms of monetary profit. It may have aspects of recognition, and many other kinds of perceived rewards other than money. See for example also Nelson (1993).
- 48.
Güth et al. (1982). Also Thaler (1988), Schotter et al. (1996).
Much research has been done on this. For an overview, see, for example, Camerer and Thaler (1995), Güth (1995), Camerer (2003), Murnighan (2008), and Hoffman (2008).
Research has been conducted in many adjacent fields further discussion the ultimatum game, some with intriguing conclusions (e.g. Sanfey et al. 2003; Wallance et al. 2007; Burnham 2007).
See especially also publications by Ernst Fehr and Armin Falk for details and a more elaborate analysis of fairness and reciprocity (e.g. Fehr and Schmidt 1999; Falk and Fischbacher 2006).
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Weiers, G. (2014). Bridging the Gap. In: Innovation Through Cooperation. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-319-00095-4_10
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