Priceless goods, brief intro to Public Goods

Mainly, we could define two kind of goods: Private and Public. The main difference between them is that, the first is characterized by having a high level of subtractability. In short, that means that if someone consumes the good, the quantity available to others is reduced. And excludability, which is that the use of the good is restricted by the producer to those people who are willing to pay the amount they are willing to accept. Thus, those who doesn’t reach this requirement are excluded.

On the other hand, Public Goods are characterized by containing a very low level of subtractibility and excludability. Low subtractability means that a good is available to all consumers at the same time, and consumption by one consumer doesn’t reduce the supply available for another consumer. Low excludability mainly implies that one can’t be easily excluded from consumption. For instance National Security, which is available to all citizens of a country simultaneously, also culture or knowledge are pure Public Goods.

Why is it difficult to know how much to charge you for Public Goods?

According to the definition given above, determining exactly how much you should pay for Public Goods could be very complicated. Why? In the case of private goods, there are different indicators such as costs, markup prices, etc. But trying to apply same rules for Public Goods could be impossible, otherwise how do we know the real cost of National Security, a Mathematical Theorem or a Nation’s culture?, or how can we measure how much of the ozone layer do we consume and how much are we willing to pay for it? In other words, how can we determine Demand for a Pure Public Good?

Of course, for those Public Goods that can be provided under public or private ownership, there exists mechanisms to help to “Reveal Demand” (such as Clark’s tax, Insurances and Veto Power, for a deeper lecture I’d recommend Buchanan) so as to make every consumer to pay according to his “willingness to pay”.

Unfortunately, as many things which are perfect in theory, but could be impracticable when you try to apply them in the reallity, and it’s almost impossible getting an efficient outcome (though, not for that you stop paying for it).

Then, what about those goods that are not supplied either under private or public ownership such as the Ozone layer, gravity or the air we breath?

Simply, this kind of goods, which also we can’t avoid their consumption, are priceless. This is why we don’t have to pay a tax upon the amount of oxygen you consume per day, unless until now.

By Laura M. Gonzalez

Reviewing Open Innovation

Knowledge is owned by no one, but it belongs to everybody 

Knowledge is a Public Good, and so are scientific discoveries based upon previous knowledge that open the door to technological innovations, thus improving our lives (or at least to those who can afford them). In previous posts was explain the nature of Public Goods and some of the problems that arise during the production process. 

If we understand that first we should worry about how to generate those breakthroughs and as a second step how to distribute their benefits among society, we might be interested in new ways of organizing the innovation production (something we already done in CBPP). In particular, this post is a review of what is known as  “Open Innovation” (OI). 

The technological jump given (mainly) in the last century has lead to the democratization of knowledge and information. Nowadays, media rely each time more on communication means that emerged or evolved in the last couple of decades and reach not only faster but cheaper to the public. New technologies are also employed in education and as a tool of academic divulgation. I’m not being too original if I say that today, more than ever in the developed world Knowledge is owned by no one, but it belongs to everybody. 

With the “Open Innovation” concept, Henry Chesbrough remarked the obviquity of the technology that unlocks the access to the masses to a great amount of contains, only available for a minority before, by drastically reducing the time between requesting and obtaining information. 

This framework of knowledge, easy reachable to everyone, gives place to the following situation: if firms want to insure their survival in the market they ought to buy, license and even merge with other companies in order to obtain the “know-how” or the technologies to be able to compete face to face against other firms. In other words, firms can’t blindly trust only on their own R&D, if they want to remain alive they have to apply the popular saying: “if you can’t lick them, join them”. Moreover, from the O.I. point of view, organizations should try to sell the part of internal research not directly applicable to their business model to others that could find it interesting.

Giving a thoroughly thought to Chesbrough’s terminology, this is only labeling already existing interactions between firms. Though, this doesn’t mean we shouldn’t give a deeper analysis to the subject. 

First, it’s important to consider that if he was talking about O.I., there must be some concept referring to “Closed Innovation”. Defining the latter it’s easy, just consider one firm limiting its innovation to that produced by its own R&D department with little influence from outside. 

Second, what are the advantages of the “Open Innovation”? Answering may sound also redundant, but obviously using other people’s discoveries or advances saves the company all the associated expenses involved in the process, among others: risk of the research uncertain outcome, time spent on getting inspiration, creativity and originality of the project, execution, development and implementation. To put it simply, we are talking about a R&D externalization method to avoid the costs described above. 

Apart from that, we should think of the advantage of arriving late. It’s well known that “who hits the first, hits twice” (popular saying, again). But in the technological market, where first trials are hardly successful, a firm could save a lot of money learning from its competitors mistakes and so skipping a market fiasco for instance, due to technical reasons (click here for a couple of examples) or market maturity (remember Newton?). 

Furthermore, acquiring other’s companies developments could be the starting point to create their own. Thereby, they save the base technology R&D and they can invest that money in producing a flashy new invention. Mostly, the O.I. model promotes firms’ cumulative innovation. 

Nonetheless, continuing with the proverbs, “all that glitters is not gold”. Clearly, a firm can’t only opt for implementing O.I. as its innovation strategy, because drawbacks of this can be founded easily. Open Innovation may represent loss of control of the research development. In the case of non-generic or non-base technology this fact might be crucial, since the firm should contemplate the expenses of buying the license and also customizing to its business model. As a result, they should evaluate if they are really saving money hiring external R&D and if they want to position themselves as leader company or not,  which is the case of Apple’s latest hit the iphone and ipod touch, which rely their success on using technology none of the firms in the market was implementing. 

Aside from that, O.I. does not implies firms are saving license, partnership or patent costs, which for instance in the software business may arrive to millionaire amounts. Besides, they will still have to adapt the innovation to their internal structure, what can be translated into: the extra cost of hiring someone to do it for them or the cost of doing the customization by themselves.    

In a nutshell, an as a way of concluding this post, we could say “Open Innovation” is the business model in which the firm determines what external information to bring inside, and what internal information to take outside.