Digital Platforms and Innovation: Lessons for Innovation Policy and Regulation

Unease about the growing market power of digital platforms has unleashed a broad discussion on remedial policy measures. One concern is that the high level of concentration in platform markets is impeding digital innovation. A somewhat more narrowly construed assertion is that the dominance of digital platforms is biasing innovation in a direction that favors shareholders at the cost of the public interest. This paper critically examines the validity of these potentially troubling outcomes, the conditions under which they might materialize, and what might be done to mitigate them. We draw on insights from innovation economics and innovation management to address three sets of questions: First, the paper develops a theoretical framework to deepen our understanding of the multi-faceted relations between digital platforms and innovation. Second, it discusses which data and metrics could be used to examine these interactions empirically. Third, it discusses implications for the design of policies toward digital platforms. Innovation economics has drawn on computer science, management and other disciplines to explore different types of innovation, including modular, architectural, incremental, radical, independent, interdependent, systemic innovation. In addition, it has examined the coordination needs of business processes in complementary innovation systems. Our approach allows identifying multiple, coexisting innovation processes in the platform economy, each follow a somewhat different economic logic. The conceptual analysis, with a preliminary set of related innovation data, suggests that platforms have both positive and negative effects on innovation. For example, they facilitate coordination among affiliated market players, enhance the innovation opportunities space. Moreover, their enormous capitalization and financial resources allows them to pursue innovation projects with a high risk/high reward profile. At the same time, their dominance in data and advertising markets may, over time, reduce the overall innovation activity in the sector. Finally, platforms may bias innovation experiments by start-up companies in a direction that will increase their chances to affiliate with or sell out to platform players. The net effect of these contradictory effects is a priori not clear and can be influenced by policy. The paper concludes with a discussion of preliminary policy implications. A key insight is that an innovation economics perspective redirects the focus of regulatory and other digital policies away from specific detailed interventions to the design of the broader rules governing a market. It also provides a strong argument in favor of institutional and organizational diversity. Most likely, the full innovation potential of next generations of digital technology will be best explored in a contest between a multitude of private, public, and non-profit players.