Optimal Allocation of Property Rights between Platform and Application Firms in IT Industry

This paper examines the optimal allocation of property rights between platform and application firms in IT industry.The platform firm owns a software platform and related software,while application firms are needed to make the platform successful by creating application on this platform.As the platform firm has ownership over the platform,it has incentive to expropriate the rent of application firms ex post,yielding a "hold-up" problem.The paper discusses three popular platform licensing schemes: proprietary,standardization and open source.Our model shows that firms' specific-investment plays an important role in the optimal allocation of property rights.When a firm's investment is crucial to the success of the platform,it should deserve a higher bargaining position.