Combinatorial Public Goods

Open Source

An Experimental Study ofOpen Innovation using

MASTERMIND® Benjamin Hak-Fung Chiao

(Advisor: Yan Chen)

Doctoral Student, School of Information, University of Michigan Accepted for presentation at the Economic Science Association's

November 2004 meeting

What is Open Innovation?

• A method to solve problems with other people by revealing some or the complete history of algorithm already used.

• Example: Open Source.

Research Question

• To understand the economic implications of open innovation when it is operated within the structures of modular and non-modular team production.

If one person fails…

• Non-modular (O-ring)

• Payoff = 0• E.g. System Software

• Modular

• Payoff > 0• E.g. Desktop Software

What is MASTERMIND?

The Experiment

• To extend the MASTERMIND game into a collaborative version in which the combination breaker can post the games to a public pool.

Experimental Design

• Treatment 1: Modularity.

• Treatment 2: Non-Modularity

• Within-subject design:– Session A: Treatment 2 Treatment 1– Session B: Treatment 1 Treatment 2

• 16 students in each 2-hr session

• Average payment is $20

The Software

The Software

Public Pool-- the only non-private area

The Software

History of work

of

a posted game

Commission

Prices

The Software

History of work

of

a posted game

Commission

Prices

clone

How Cloning Works

• The history of work of a posted game will be duplicated to your private screen when you clone it.

• Each posted can be cloned for multiple times

• The person who solves it first gets the commission

Prediction

• Theorem: In a non-modular payoff structure, a Nash equilibrium is for everyone to set commission price = 0, and solve all games in the public pool.

Graph 2 Commission, Solved And Unsolved Clones Of Posted Games Across Periods in SESSION B

16

3

8

1

5

-1

0

1

2

3

4

5

6

7

8

9

0:00:00 0:35:00

Time and Periods

Co

mm

issi

on

(in

Po

ints

, 10

Po

ints

=$1)

Posted Games Solved By Subjects Other Than The Poster Posted Games Solved By The Poster Posted Games Not Solved

Note: The area of the circle is proportional to 1 plus the number of clones made from the posted game identified by the pair of commission and posted time. The numbers next to some circles to the left and to the right indicate these numbers.

Period 1 Period 3Period 2 Period 4 Period 5 Period 6 Period 7 Period 8 Period 9 Period 10

Treatment change: O-ring production function is enabled

64% 64% 79%81%83% 96% 98% 96%92% 100%

Graph 2 Commission, Solved And Unsolved Clones Of Posted Games Across Periods in SESSION B

16

3

8

1

5

-1

0

1

2

3

4

5

6

7

8

9

0:00:00 0:35:00

Time and Periods

Co

mm

issi

on

(in

Po

ints

, 10

Po

ints

=$1)

Posted Games Solved By Subjects Other Than The Poster Posted Games Solved By The Poster Posted Games Not Solved

Note: The area of the circle is proportional to 1 plus the number of clones made from the posted game identified by the pair of commission and posted time. The numbers next to some circles to the left and to the right indicate these numbers.

Period 1 Period 3Period 2 Period 4 Period 5 Period 6 Period 7 Period 8 Period 9 Period 10

Treatment change: O-ring production function is enabled

Graph 1 Commission, Solved And Unsolved Clones Of Posted Games Across Periods in SESSION A

13

8

4

3

1

-1

0

1

2

3

4

5

6

7

0:00:00 0:35:00

Time and Periods

Co

mm

issi

on

(in

Po

ints

, 10

Po

ints

=$1)

Posted Games Solved By Subjects Other Than The Poster Posted Games Solved By The Poster Posted Games Not Solved

Note: The area of the circle is proportional to 1 plus the number of clones made from the posted game identified by the pair of commission and posted time. The numbers next to some circles to the left and to the right indicate these numbers.

Period 1 Period 3Period 2 Period 4 Period 5 Period 6 Period 7 Period 8 Period 9 Period 10

Treatment change: O-ring production function is disabled

77% 81% 88% 90%92% 90% 96% 94% 96% 94%

64% 64% 79%81%83% 96% 98% 96%92% 100%

How to Coordinate to Avoid Zero Payoff

• If difficulty level can be measured at all:

• 1. Use price to rank the difficulty of games so resources are directed to solve higher-price games first, and/or

• 2. Browse the posted games and decide the difficulty of games.

• If not, price can actually produce noises.

Main Results

1. In non-modular structure: Converge to Nash Monotonous zero commission

Completely removes a signaling function of price as a measure of difficulty levels.

Remove noisy price signal if difficulty can’t be measured

Not sufficient to cause the catastrophic outcome of zero payoff.

2. Why? Learned to solve games faster Learned to coordinate through the public pool Learned strategies used in posted games

Implications

• This provides a basis for us to hypothesize that open innovation is a key explanation because it allows subjects to directly observe the history of work already done and potentially direct more resources to the more difficult tasks.

Extensions 95 % of software features not yet used

Royalty in Hi/Low Piracy Regimes Can only goes to original poster (no-piracy) Goes to any people reposting the game(piracy)

Degree of Exclusivity Grab Clone

Trade Secrey (TS) Cover Rows of Posted Games (Common-Knowledge TS) Hide Rows of Posted Games (Not Common-Knowledge

TS) Post/Grab/Cone Fees Individual/Collective Game Quota