Designing Innovation Tournaments to Maximize Their Value: An Economic Perspective

We analyze open innovation tournaments to see when they are stable, can attract sellers, and can provide attractive prices to seekers (buyers). Although these tournaments are usually analyzed under the restrictive condition that only a single seller wins and receives a fixed and pre-announced level of compensation from the seeker, we examine more general settings in which in settings where tournament participants can derive extra value beyond the announced reward from sources other than the seeker if they win, and can also retain a fraction of the value of their submissions even if they lose. We show that contrary to (implicit) assumptions in prior research, in the absence of these additional incentives open innovation tournaments may become unsustainable in the presence of high number of potential participants. On the other hand, when either the salvage value from unsuccessful submissions or the extra compensation derived by a tournament winner, or both, are high enough, tournaments become an attractive mode of procuring innovative solutions even in the presence of high number of potential solvers. In particular, we describe settings in which a firm holding a tournament can entice potential solvers to participate without itself offering any direct monetary compensation to a potential winner.