Capturing value from innovation
MC/Short answer questions,
Essay-type / open question
The course aims to provide the student with knowledge on how firms capture and protect value
from their innovations - also referred to as 'value appropriation'.
Value creation through innovation and value appropriation in the form of economic returns can
be considered as two sides of the same coin: without prospects of value appropriation from
innovations, firms will not or cannot create new sources of value.
Week 1
Slides
‘value appropriation’ = company’s ability to reap (financial) benefits from its innovations.
Companies can employ appropriability mechanisms to benefit from their innovations horizontally
(against competitors: ‘value protection’) and vertically (against suppliers and buyers: ‘value
capture’); we discuss the effectiveness of a variety of formal (e.g., patents, copyright) and
informal (secrecy, market lead time) appropriability mechanisms.
Value creation: the ability of innovators to create value with their innovations to stakeholders
Value appropriation: the ability of innovators to capture and protect the value of their
innovation
Innovation = a firm that introduces something that is new to the industry/market.
Innovation: when no identical or similar products have been introduced at an earlier date by
other firms operating in the same industry.
Imitation: when competitors copy the innovator (without consent), even though it is something
new for them.
Diffusion: the adoption of an innovation
> by buyers: buyer diffusion
> by competitors: seller diffusion
May be initiated and stimulated by the innovator (dissemination)
May be deterred or prevented by the innovator (prevention of imitation)
When is dissemination likely/good? = Dissemination (actively encouraging diffusion of an
innovation) is likely and desirable when it increases the innovator’s overall payoff more than
restricting imitation would
,The Virtuous Circle = When a product gains momentum.
The Logic: More users > Increased value> More new users attracted> Even higher value.
The Result: This often leads to a "winner-take-all" scenario where one dominant player captures
the entire market because the value of being on that specific network is too high to ignore.
The Vicious Circle = if a network starts losing users, it can collapse rapidly.
The Logic: Fewer users > Decreased value for those remaining > More users leave > Value
plummets. The Result: This is why it is so difficult for new competitors to break into established
markets. Even if the new product has "better features," it lacks the "compatible users" that
provide the primary value.
Why the curve flattens:
Early Stages: Every new user adds a significant number of potential connections.
Late Stages: Once "everyone" is already on the platform, adding one more person provides
diminishing marginal utility. The network is already saturated, and the value gain is incremental
rather than transformative.
In these industries, the best technology doesn't always win; the biggest network usually does.
Direct & Indirect network effects! Utility increases with more adopters & users
Strategy: “Increase the pie, then share the pie”
Examples: fashion, fax, CD/DVD/Blu ray player, eBay, Facebook, Uber, Operating Systems,
Video game consoles, etc.
Easier to attain legitimacy & produce next line products, but danger for society of premature
lock-in to inferior system standards
left side; difficult to identify unlawful
imitation. Right not.
,Counterfeits = exact to copy
Middle; inspiration(blue legal area)
IPR(intellectual property rights) - Legal Protection
Intellectual property (IP): legal field referring to creations of the mind such as musical, literary,
and artistic works; inventions; and symbols, names, images, and designs used in commerce:
- Copyrights: creator of artwork gets exclusive rights to control its distribution for a certain
time period.
- Trademarks: a distinctive sign which is used to prevent consumer confusion among
products in the marketplace.
- Patents: protection for a new, useful, and non-obvious invention, in exchange of public
disclosure.
- Related rights: e.g., trade secret. (not IPR in strict sense)
Holder of IP has certain exclusive rights (right to distribute, copy, exclude others from producing)
to the creative work, commercial symbol, or invention by which it is covered.
> a form of ‘temporary monopoly’ enforced by the state
Copyrights = gives owner of a document, musical composition, book, or other piece of
information, the right to decide what others can do with it. Copyrights are exclusive rights to use
or authorize others to use the work on agreed terms.
Application: Automatically granted/No need to register
Copyright only covers works that are a form of material expression: recorded compositions, not
just a song in your head.
Duration: limited. lasting 70 years after the author’s death or 70 years after first publication, if
the author is an organization
Exceptions to copyright: Fair use/citation (parts of the work only) - Private copy - Educational
use - Parody (e.g., spoofs) - Reselling legal copies (first-sale doctrine)
Examples: writings, music, drawings, dances, computer programs, architectural buildings,
movies and also data bases. Not included: ideas, concepts, principles, (‘brute’) facts (e.g.,
1+1=2) and (tacit) knowledge.
Trademarks
Trademark (™(unregistered) and ®(registered)) = a distinctive sign used by an organization to
identify that its products/services with which the trademark appears originate from a unique
source of origin in order to distinguish its products/services from competitors.
Examples: Name, word, phrase, logo, symbol, design, image, audible sign, or a combination of
these elements can be trademarked
Application: Not required to register ™, but is possible at federal offices/trademark centers ®.
Owner must show that mark is not likely to be confused with other trademarks for
items in same general class. In lawsuits, organizations need to prove that they have invested in
the trademark.
Trademarks can last indefinitely as long as they are used in commerce.
Costs for application and renewal, and legal action
, Patent = a set of exclusive rights granted by a state to an inventor for a fixed period of time
in exchange for a disclosure of an invention. Protection of the idea itself in a certain area
for a given time (e.g., max. 20 years).
3 Types:
utility patents: protects the functionality of a given item.
design patents: covers the ornamental design for an object, including designs of beverage
containers, furniture, computer icons: industrial designs.
plant patents: protects distinct and new variety of plant.
Most powerful protection: exclusive right granted to a patentee to exclude others from
making, using, selling, offering to sell or importing the invention.
Application: An organization must apply at national patent office
Patent offices use several criteria:
idea must represent a new, non-obvious development compared to ‘prior art’
An application needs to offer an inventive step; incremental innovations do not qualify.
The application needs to offer the possibility for industrial application.
A physical component must be involved (not always required: US software).
Costs for application & protection are high:
yearly costs for renewal of the application - costs to search for possible infringement - costs
associated with the legal action needed to redress infringement.
Utility patents protect functional inventions; design patents protect ornamental appearance.
Utility patents block competitors from using the same technology.
Design patents block competitors from copying the look, even if they use different technology.
Trade secret – related right = a formula, practice, process, design, instrument, pattern, or
compilation of information which is not generally known or reasonably ascertainable, by which a
business can obtain an economic advantage over competitors or customers. (e.g., Coca-
Cola recipe, Google’s search algorithm)
Protect confidentiality through non-compete and non-disclosure contracts with its employees
No formal protection: a third party is not prevented from independently duplicating and using the
secret information once it is discovered additional laws needed (labor law).
Enhancing the lifetime value of IP. Companies can enhance the value of IP via
combining and sequencing various IPR
MC/Short answer questions,
Essay-type / open question
The course aims to provide the student with knowledge on how firms capture and protect value
from their innovations - also referred to as 'value appropriation'.
Value creation through innovation and value appropriation in the form of economic returns can
be considered as two sides of the same coin: without prospects of value appropriation from
innovations, firms will not or cannot create new sources of value.
Week 1
Slides
‘value appropriation’ = company’s ability to reap (financial) benefits from its innovations.
Companies can employ appropriability mechanisms to benefit from their innovations horizontally
(against competitors: ‘value protection’) and vertically (against suppliers and buyers: ‘value
capture’); we discuss the effectiveness of a variety of formal (e.g., patents, copyright) and
informal (secrecy, market lead time) appropriability mechanisms.
Value creation: the ability of innovators to create value with their innovations to stakeholders
Value appropriation: the ability of innovators to capture and protect the value of their
innovation
Innovation = a firm that introduces something that is new to the industry/market.
Innovation: when no identical or similar products have been introduced at an earlier date by
other firms operating in the same industry.
Imitation: when competitors copy the innovator (without consent), even though it is something
new for them.
Diffusion: the adoption of an innovation
> by buyers: buyer diffusion
> by competitors: seller diffusion
May be initiated and stimulated by the innovator (dissemination)
May be deterred or prevented by the innovator (prevention of imitation)
When is dissemination likely/good? = Dissemination (actively encouraging diffusion of an
innovation) is likely and desirable when it increases the innovator’s overall payoff more than
restricting imitation would
,The Virtuous Circle = When a product gains momentum.
The Logic: More users > Increased value> More new users attracted> Even higher value.
The Result: This often leads to a "winner-take-all" scenario where one dominant player captures
the entire market because the value of being on that specific network is too high to ignore.
The Vicious Circle = if a network starts losing users, it can collapse rapidly.
The Logic: Fewer users > Decreased value for those remaining > More users leave > Value
plummets. The Result: This is why it is so difficult for new competitors to break into established
markets. Even if the new product has "better features," it lacks the "compatible users" that
provide the primary value.
Why the curve flattens:
Early Stages: Every new user adds a significant number of potential connections.
Late Stages: Once "everyone" is already on the platform, adding one more person provides
diminishing marginal utility. The network is already saturated, and the value gain is incremental
rather than transformative.
In these industries, the best technology doesn't always win; the biggest network usually does.
Direct & Indirect network effects! Utility increases with more adopters & users
Strategy: “Increase the pie, then share the pie”
Examples: fashion, fax, CD/DVD/Blu ray player, eBay, Facebook, Uber, Operating Systems,
Video game consoles, etc.
Easier to attain legitimacy & produce next line products, but danger for society of premature
lock-in to inferior system standards
left side; difficult to identify unlawful
imitation. Right not.
,Counterfeits = exact to copy
Middle; inspiration(blue legal area)
IPR(intellectual property rights) - Legal Protection
Intellectual property (IP): legal field referring to creations of the mind such as musical, literary,
and artistic works; inventions; and symbols, names, images, and designs used in commerce:
- Copyrights: creator of artwork gets exclusive rights to control its distribution for a certain
time period.
- Trademarks: a distinctive sign which is used to prevent consumer confusion among
products in the marketplace.
- Patents: protection for a new, useful, and non-obvious invention, in exchange of public
disclosure.
- Related rights: e.g., trade secret. (not IPR in strict sense)
Holder of IP has certain exclusive rights (right to distribute, copy, exclude others from producing)
to the creative work, commercial symbol, or invention by which it is covered.
> a form of ‘temporary monopoly’ enforced by the state
Copyrights = gives owner of a document, musical composition, book, or other piece of
information, the right to decide what others can do with it. Copyrights are exclusive rights to use
or authorize others to use the work on agreed terms.
Application: Automatically granted/No need to register
Copyright only covers works that are a form of material expression: recorded compositions, not
just a song in your head.
Duration: limited. lasting 70 years after the author’s death or 70 years after first publication, if
the author is an organization
Exceptions to copyright: Fair use/citation (parts of the work only) - Private copy - Educational
use - Parody (e.g., spoofs) - Reselling legal copies (first-sale doctrine)
Examples: writings, music, drawings, dances, computer programs, architectural buildings,
movies and also data bases. Not included: ideas, concepts, principles, (‘brute’) facts (e.g.,
1+1=2) and (tacit) knowledge.
Trademarks
Trademark (™(unregistered) and ®(registered)) = a distinctive sign used by an organization to
identify that its products/services with which the trademark appears originate from a unique
source of origin in order to distinguish its products/services from competitors.
Examples: Name, word, phrase, logo, symbol, design, image, audible sign, or a combination of
these elements can be trademarked
Application: Not required to register ™, but is possible at federal offices/trademark centers ®.
Owner must show that mark is not likely to be confused with other trademarks for
items in same general class. In lawsuits, organizations need to prove that they have invested in
the trademark.
Trademarks can last indefinitely as long as they are used in commerce.
Costs for application and renewal, and legal action
, Patent = a set of exclusive rights granted by a state to an inventor for a fixed period of time
in exchange for a disclosure of an invention. Protection of the idea itself in a certain area
for a given time (e.g., max. 20 years).
3 Types:
utility patents: protects the functionality of a given item.
design patents: covers the ornamental design for an object, including designs of beverage
containers, furniture, computer icons: industrial designs.
plant patents: protects distinct and new variety of plant.
Most powerful protection: exclusive right granted to a patentee to exclude others from
making, using, selling, offering to sell or importing the invention.
Application: An organization must apply at national patent office
Patent offices use several criteria:
idea must represent a new, non-obvious development compared to ‘prior art’
An application needs to offer an inventive step; incremental innovations do not qualify.
The application needs to offer the possibility for industrial application.
A physical component must be involved (not always required: US software).
Costs for application & protection are high:
yearly costs for renewal of the application - costs to search for possible infringement - costs
associated with the legal action needed to redress infringement.
Utility patents protect functional inventions; design patents protect ornamental appearance.
Utility patents block competitors from using the same technology.
Design patents block competitors from copying the look, even if they use different technology.
Trade secret – related right = a formula, practice, process, design, instrument, pattern, or
compilation of information which is not generally known or reasonably ascertainable, by which a
business can obtain an economic advantage over competitors or customers. (e.g., Coca-
Cola recipe, Google’s search algorithm)
Protect confidentiality through non-compete and non-disclosure contracts with its employees
No formal protection: a third party is not prevented from independently duplicating and using the
secret information once it is discovered additional laws needed (labor law).
Enhancing the lifetime value of IP. Companies can enhance the value of IP via
combining and sequencing various IPR
