Generativity and Profitability on B2B Innovation Platforms: A Simulation-based Theory Development

Abstract

Firms generate innovations to profit from market opportunities, which are newly identified customer needs not yet being met in the market. The rising complexity of market opportunities requires collaboration among multiple partner firms. However, this multipartner collaboration increases transaction and production costs when generating innovations. To address these challenges, incumbents build B2B innovation platforms with mechanisms to reduce partners’ transaction and production costs. We do not yet know if and when partners would choose to use the incumbent’s traditional service innovation model or the B2B innovation platform and how this choice would affect the generativity and profitability of innovations for the incumbent and the partners. We used agent-based modeling and simulation to develop a theory to address these questions. We found that the complexity of market opportunities interacts with the B2B innovation platform’s transaction and production mechanisms to jointly affect whether partners use the platform and when the incumbent and partners achieve generativity and profitability. When the complexity of market opportunities is low, partners use the traditional service innovation model. As complexity increases to medium or high levels, partners begin to use the B2B innovation platform mechanisms to address the transaction and production challenges presented by the complexity of market opportunities. However, there are limits to how much the platform mechanisms can address these challenges. The complexity of market opportunities inhibits the emergence of network effects on B2B innovation platforms and limits the generativity and profitability of platform partners. There are diminishing benefits of investing in the platform’s transaction and production mechanisms, and complexity affects whether the platform owner or the partners profit from innovations generated on the platform.