Generativity Tension and Value Creation in Platform Ecosystems

Abstract

Platform-based technology ecosystems are new forms of organizing independent actors’ innovations around a stable product system. This collective organization is proving superior to traditional, vertically integrated systems in many sectors because of greater “generativity”—the ecosystem’s capacity to foster complementary innovation from autonomous, heterogeneous firms—which extends the usage scope and value of the platform to users. However, greater generativity can also lead to greater variance in the way ecosystem members’ contributions satisfy users’ needs, and it could potentially hinder the ecosystems’ value creation. We draw on collective action theory to examine generativity’s impact on user satisfaction and the mechanisms driving it. We argue that products enhancing user satisfaction contribute to a collective, shared asset, the platform system reputation, from which all participants benefit. Thus, generativity has both a positive (system reputation) and negative (free-riding) effect on the ecosystem members’ incentives for developing products that enhance user satisfaction. We argue that the negative free-riding effect prevails as the platform system matures and competition with alternative platform systems increases. Using data from the video game industry, we find supportive evidence for the free-riding effect, which generates an average loss in total revenue for first-rate games of about $36.5 million and a drop of about 3.3% in the console’s market share. By identifying the conditions that exacerbate free riding in platform ecosystems, our study contributes to the understanding of the evolutionary dynamics of platform ecosystems. It also highlights one feedback mechanism governing collective action in ecosystems and its implications for value creation.