Innovation Contests, Open Innovation, and Multiagent Problem Solving

In an innovation contest, a rm (the seeker) facing an innovation related problem (e.g. a technical R&D problem) posts this problem to a population of independent agents (the solvers) and then provides an award to the agent that generated the best solution. In this paper, we analyze the interaction between a seeker and a set of solvers. Prior research in Economics suggests that having many solvers work on an innovation problem will lead to a lower equilibrium e ort for each solver, which is undesirable from the perspective of the seeker. In contrast, we establish that the seeker can benet from a larger solver population as he obtains a more diverse set of solutions, which mitigates and sometimes outweighs the e ect of the solvers’’ underinvestment in e ort. We demonstrate that the ine ciency of the innovation contest resulting from the solvers’’ under-investment can further be reduced by changing the award structure from a xed price award to a performance contingent award. Finally, we compare the quality of the solutions and seeker prots with the case of an internal innovation process. This allows us to predict which types of products and which cost structures will be the most likely to benet from the contest approach to innovation.