Essays on Competition, Innovation and Firm Strategy in Digital Markets

While digital industries are an increasingly important area of economic activity, the underlying structural features of such settings differ fundamentally from more conventional brick-and-mortar industries. Yet, little is understood about how some of these characteristics influence the process by which market actors create and capture value. In this thesis, I look at several attributes of digital industries (non-monetary motivations, freemium business models, network effects, digital design and digital content) and consider how these influence value creation and capture. While each paper looks at a specific question, the overarching contribution of this dissertation is to help explain how the unique set of conditions which characterize digital industries influence the behavior of market actors. The first paper looks at how competition affects the innovative output of individuals motivated by non-monetary rewards. Specifically, I contrast how competition affects the innovative output of ’unpaid” individuals motivated by non-monetary rewards relative to ’paid’ or profit seeking individuals motivated by monetary rewards, both in terms of the rate and direction of innovative activity. I find that an increase in the number of competitors has a stronger negative effect on the innovative output of paid individuals compared to unpaid individuals. However, I find that as competition increases unpaid producers are less likely to reuse existing components, suggesting that they develop products which are more uncertain but can potentially lead to technological breakthroughs. Alternatively, as competition increases paid producers are more likely to reuse existing components, suggesting that they develop products which are less uncertain but also less likely to lead to breakthrough innovations. The results of this paper suggest that as competition increases, a division of labour emerges in digital industries between unpaid individuals which develop uncertain and novel innovations, and paid individuals which reuse many of these components to develop their own innovations. This contributes to both the literature on technology platforms and the literature that has looked at the recombinant nature of technological innovation.