On platforms, incomplete contracts, and open source software

- The organizational form of a platform affects investment incentives in innovation.
- Integration leads to high platform and low application investments.
- Open-source leads to low platform and high application investments.
- The organizational form is chosen to minimize investment inefficiencies.

We analyze investment incentives for a firm A owning a software platform and an application and a firm B deciding whether to develop a new application for the platform. While B's entry helps the success of the platform, B fears ex post expropriation by A and is hence reluctant to enter and invest. We show that different platform governance structures prevalent in the Information and Communication Technology industry (integrated, proprietary, standardized, open source platform) serve to balance investment incentives for the platform and for the applications.