Networks of Tinkerers a model of open source

Networks of Tinkerers: a model of open source innovation Peter B. Meyer U. S. Bureau of Labor Statistics But nothing here represents official findings or policy. March 24, 2006 Midwest Economics Association, Chicago 1

Introduction Hobbyists have developed important technology. q open source software n q personal computers n q Linux; email processing; Web servers/browsers Homebrew Club of hobbyists, circa 1975 airplanes – a clearly documented case Goal here: try some assumptions about the hobbyists / tinkerers show they would share information in networks explore assumptions a bit 2

Aircraft developments From the 1870 s to the 1900 s there is a lot of “open-source” innovation in aircraft q q 1800 – George Cayley and many others try aeronautical experiments starting 1870 s, several aeronautical journals 1893 Octave Chanute’s Progress in Flying Machines 1903 – Wrights fly 3

Assumptions for micro model n Assume there are motivated tinkerers q n Assume they have a way to make “progress” q n We do observe this defining progress carefully Assume total technological uncertainty q q No market is identifiable so no R&D / competition The tinkerers would share information 4

The Tinkerer has activity/hobby A. (for “aircraft” or “activity”) Tinkerer receives positive utility from A of at period. • a 0 is known • later choices and rules determine at β is a discount factor between zero and one (assume. 95) applied to future period utility. Net present expected utility: 5

Tinkering rules n n Tinkerer may invest in ("tinker with") A The agent thinks that tinkering this period will raise all future period payoffs at by p units each time period. q p stands for a rate of progress, which is subjectively experienced by the agent q q We assume p is fixed and known to the agent Example: . 07 6

Tinkering decision n Tinkerer weights estimated costs and benefits n Benefits from one effort to tinker equal p in each subsequent period. n The present value of those payoffs is: Tinkerer compares those gross benefits to the cost which is 1 utility unit 7

Rates of Progress must meet the criterion above for tinkering to be worth it Progress is subjective There are not many tinkerers working on this activity who can make this much progress. 8

Payoffs from endless tinkering Payoffs period 0 -1 period 2 period 3 period 4 Series total p p (-1+pβ/[1 -β] )=Z -1 p p p β(Z) -1 p p β β(Z) -1 p β β βZ -1 . . . Z/(1 - β) Present value of all that at time zero has a closed form: 9

A network of two tinkerers n Case of two tinkerers with identical utility functions q p 1 and p 2 – subjective rate of q n progress Their innovations are useful to one another Tinkerers form a network Present value of expected utility: 10

Subgroups of occasional tinkerers n n A group of slow-progress tinkerers might agree to work together to generate progress rate p. Then the group produces output like a single “tinkerer” And has the same incentive to join other groups Wilbur and Orville Wright could be one tinkerer, as could q q q Boston-area group All readers of a certain journal Kite people, together, as distinguished from balloon people 11

“Progress” is subjective 12

Standardization and Specialization n n Only the fraction f (between 0 and 1) of experiments by player two are usable to player one Suppose for a cost cs player one can adjust his project to look more like the other tinkerer’s project And, that this would raise the usable findings to f 2 That’s standardization Present value of utility from standardizing is: 13

Standardization and Specialization Key comparison is above Player one benefits more from standardizing if, ceteris paribus: n n q q q n n the other tinkerers are producing a large flow of innovations p 2; the cost of standardizing cs is small; the gain in useful innovations from the others (f 2 f) is large. Same logic supports specialization These are technology phenomena, not requiring market processes 14

Searching and Joining n Suppose there is a cost to joining the network q costs of subscribing, paying attention q it’s worth the cost to a tinkerer if n the cost (cj) is low n he values future outcomes a lot n the others are producing a lot of progress (p) n their progress is useful to him – f is high enough n Suppose there is also a cost to searching for new members q Chanute wrote book q others published journals q Then the search costs affect innovative output (Web has effect) q There is a role for a special effort to expand the network q Paper does not model this 15

Entrepreneurial Exits n At a few points there was tension: Ader “drops out” in 1891 q Langley keeps secret wing design after 1901. (Chanute shares it anyway. ) q Wrights stop sharing as much in late 1902 After some perceived of breakthrough Jobs and Wozniak start Apple q n n q n they hire Homebrew club people as employees Red Hat becomes a company 16

Example exit: Clement Ader’s Eole n n n It traveled 50 meters in uncontrolled flight in 1891 French military thought it would be useful. Ader didn’t patent outside France because it would expose details. Chanute criticized this choice. Ader “drops out” from prior communication links. 17

Entrepreneurial exits from network If a tinkerer has an insight into how to make a profitable product it may be worth leaving the network n conducts directed R&D n becomes an entrepreneur n enters economic statistics 18

Conclusion (1) n This process may be important q q n n explaining the rise of industrial countries a long time ago with open source software, now I do not know of other models of it Key assumptions: q q technological uncertainty (no clear product and market) motivated tinkerers some way to make progress some way to network 19

Conclusion (2) n n n This is a positive sum game, with economies of scale Search and matching costs take some more thinking An industry can spring out of this, not well modeled yet 20