So once again, when we think about how a firm might appropriate the value from its innovation. It's a combination of the intellectual property regime and the control of these important complementary assets. So let's talk about the latter. Complementary assets, once again, are those assets necessary to translate an innovation into commercial returns. These could be things like marketing, distribution. It could be other components or supporting technology. Classic examples of like, hardware products requiring software products to go along with them. So, the role of complementary assets depends on two things. First of all simply, how important are these complementary assets? And then, how tightly held are they? Let me discuss each of these. So when we think about the importance of a complementary asset, we wanna think about dependence. So we can think about it both from the perspective of the innovation and from the perspective of the asset. So here we have a little chart where we say, all right, one axis on the y axis, we have the dependence of the asset on the innovation. How much does that asset need this innovation to be able to execute? On the other axis on the horizontal axis, we have the dependence of the innovation on the asset. How much does that innovation require that asset to be able to execute? So let's consider something that might be high on dependence from the innovator standpoint, but low on the dependence from the asset side. Think about a company coming out with a novelty item, that basically the main distribution channel is going to be a large retailer like Walmart. Well in that case, the innovator is highly dependent on Walmart as the distributor of their product. That becomes a specialized asset controlled by the asset holder. Walmart on the other and, really doesn't have to use just that innovation to be able to realize their business model. They obviously have thousands of products that they're selling through their stores. So that gives them great bargaining power now, with the innovator in that situation. We could imagine situations that are reversed. Perhaps someone has designed a particular service tied to an innovation. There are numerous kind of retail establishments that have grown up around eBay, the online trading platform. There, those companies could be very tied and dependent on eBay as an innovator in order to be able to execute there. And then you could imagine situations where eBay could make demands of them, and bargain with them because of that advantageous position. Now, if dependency is low we're really in a world of generic complementary assets, and they just simply aren't that important then to our worries and concerns about appropriability. If they're both high, now we're in this kind of co-specialized world where we both need each other, and there's this bi-lateral dependence, or mutual dependence between the asset holder and the innovation. The second thing we wanna think about is whether that asset is tightly held. And by this we mean, the asset is rare, it's not widely possessed, and it's hard for someone to imitate or substitute for. This is the idea of almost, there's a monopoly holder of that asset and I'm going to have to deal with them if I'm gonna be able to bring my product to market. On the other side we might think of assets that are freely available. They may be purchased on factor markets, may be easy to build or develop. There are many things that you might think are tightly held but in this day and age have actually become more freely available. Think about manufacturing capacity. In a older day and age that might have been tightly held by a smaller set of firms. Now, there's a vast network of perhaps manufactures that you can go to to build your innovation, to manufacture your innovation. To the extent they are widely available, and it's easy to do what your requesting them to do. That's going to advantage the innovator here. On the flip side, one could imagine a new innovation that requires a very specialized supplier. That supplier now, is a valuable asset and the complementary asset that's necessary. And it gives them bargaining power when we think about appropriating value.
