By Dylan Walsh

In June of 2014, Tesla CEO Elon Musk announced that the company was opening its library of patents to the manufacturing world. “Tesla Motors was created to accelerate the advent of sustainable transport,” Musk wrote on Tesla’s website. “If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal.” 

The announcement garnered headlines worldwide and dominated discussion on social media—which isn’t surprising given trade secrets tend to be just that: secret, the very engines of competitive advantage. Tesla was releasing to competitors the fruits of a decade of research and development.

But, at least in part, clear business logic backed this decision. Musk noted that the global automobile market is enormous, comprising a fleet of roughly two billion vehicles, and that most of these cars run on petroleum. “Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day,” he wrote. Musk was acknowledging that he could use the help of his competitors in transforming the automotive sector, which over the past century had made people extremely comfortable driving cars that burn gasoline.

A new article in Marketing Science by Yale SOM’s Jiwoong Shin and Michelle Yu of McGill explores precisely this issue and finds that, in the case of innovative products, sharing the innovation with rivals can actually increase consumer interest and expand market potential.

Shin spoke with Yale Insights about how managers can understand when it makes sense to dole out trade secrets.
 

In the paper, you look at building demand for novel products. Why is that a different process than building demand for well-known products?

To an extent, customers know what they need or want, and most products seek to satisfy that. Existing products fill an existing need or want. But when a new innovation comes to the market, customers will wonder, “Do I really need this product? I live perfectly well without it.” New innovations are generally tailored to satisfy some unknown need that customers are not aware of, and this can leave them somewhat puzzled.

For instance, people were perfectly happy before smartphones came on the market. Not many people thought the product was for them. Firms needed to convince customers: “This is a new product that you don’t know you need. I assure you that once you know what it does you won’t be able to live without one.” With an existing product this step doesn’t exist; people don’t need to be convinced to accept it.

What got you thinking about this?

Watching the failure of Google Glass. When Google Glass first came to market, people were almost universally excited about the product. There was a lot of talk; almost everyone was aware of it. And yet I didn’t find anyone who said they were going to buy a pair. People thought it wasn’t for them. It was obvious to me that there was some big discrepancy between awareness and product acceptance.

Usually when we teach the idea of promotion in marketing classes, one of the most important things is to make people aware of our product. If we expose consumers to our advertisements then we believe they will buy what we’re selling. This didn’t seem to be the case with an innovation like Google Glass. Awareness was not good enough. Google had to take the additional step of making people think about and accept the product.

You discuss one interesting way of moving beyond awareness, and that’s actually sharing the blueprints of innovation. Why is that a potentially useful approach?

Assume I come up with a brand new product. If I alone claim that this is the next big thing, then consumers are going to be doubtful about what I’m saying. They know it’s my product. They know I want to push it. This is the case with Google Glass and wearable technology. But if, say, Apple, Samsung, Huawei, and all of Google’s other competitors also say that wearables are the next big thing, then people start thinking it may be. Perhaps the market is actually moving in this direction.

For a consumer to accept a product they need to try to understand what the product is. They have to think carefully about whether they really will get benefits from it. This takes a fair amount of effort—effort that consumers aren’t usually willing to put in. So how do I convince consumers my product is the sort of thing worth thinking about? Ideally I get my rivals together so that we’re all saying this new category is the next big thing. That makes it much easier to convince customers to invest their time.

You use a model to explore this issue. What’s the basic dynamic in your model?

It’s rooted in the law of communication, as economists think about it. “Communication” in this case means I deliver my idea to you. It doesn’t mean I speak and you just listen and then forget what I was talking about—that’s not communication. I give information to you and you understand the information. You have to get it.

Critically, this isn’t a one-sided effort. If I try to explain an idea to you but you’re not really interested, then it’ll never get through, no matter how much effort I invest and how clearly I articulate the idea. If you’re not interested, then communication never happens. For communication to succeed, both sides must put in some effort. In the cases we’re discussing, the firm and the consumer must both put in effort.


Read the study: “A Model of Two-Sided Costly Communication for Building New Product Category Demand”

What we noticed is that these efforts have a particular characteristic: if I’m a firm, once I know that you, the consumer, are interested in what I have to say, then I have more incentive to put in effort because I know you’ll be listening. I’ll try to be clearer. At the same time, when a communication is clear then you, the consumer, have more incentive because it’s easier to understand. So firm and consumer efforts are complementary.

That is the starting point of our model. From there, we asked: if a company wants to convince consumers to put in effort, what if they go ask rival companies also interested in the product category to help them with the communication? If effort on the firm side is high, then consumers may think they’re seeing the next big thing, so they, in turn, put in more effort. If that happens, then all rival companies may stand to benefit.

One tricky part, though, is that efforts on the firm side, between say Google and Apple, are substitutes. If I’m Google, I want Apple to put in a lot of effort so I can freeride. Communication—advertising, in this case—is costly, so if Apple advertises a lot instead of me, then I’m happy.

What do you ultimately find?

We capture this tension that exists between the complementarity of firm and consumer communication efforts and the potential for freeriding on the firm side. If I want a rival to really promote a new product category, then it turns out I have to share a lot of secrets to convince them its worth their time and effort. So how much information a company shares with its rivals depends on how important it is to convince consumers to adopt a new category—to think about it and put effort into understanding it.

In a sense, sharing information is a way of communicating with rivals. It says, “Hey, I’m not going to monopolize this market. Let’s build it out together. You and I can all make money, but we all have to put in effort. We’ll make the pie bigger.” To do that I have to share a lot of information.

This ultimately boils down to the issue of whether companies want to be a big fish in a small pond or a small fish in a big pond. When I share information with my competitors, then we jointly make the market bigger—big pond, small fish. When I monopolize my innovation and don’t share any information—small pond, big fish. Whether or not sharing is better depends on characteristics of the market—in this case how important it is to bring the consumer on-board with an innovative product.

You mention “co-opetition” several times in the paper. What’s the connection between that idea and what you’re discussing?

Co-opetition, which was coined by my colleague Barry Nalebuff, simply means that sometimes you cooperate with your competitor. Our paper provides one micro-foundational mechanism for why firms might do that—because of the costs around communication in the case of innovative products.

If you take the case of Google Glass, consumers might not know anything about the product. Alternatively, you have standard products that people know everything about. It would seem there’s a spectrum between the two. Is there a way in which firms might get a sense of where their product sits on this spectrum?

That’s an important question, and we first have to think about this idea of a spectrum. We know that firms sometimes keep ideas secret for competitive advantage. We also know that they sometimes disclose information to their competitors to help consumers understand an innovation. That was the focus of this paper. Another alternative that we recognize is when firms disclose some information, often publicly, to deter entrance into a market, to preempt their competitors. Think about Samsung’s announcement of a foldable phone. That is a way of saying to competition, “look, we’re already ahead of you, so if you’re thinking about foldable electronics then don’t bother.”

Importantly, Samsung is also talking to consumers. They’re announcing their foldable phone not just to talk about the technology, but to tell consumers they should wait. “Hey, this is the next big product, so wait, don’t buy a new iPhone!” This is a strategy known as disclosure as entry deterrent. How companies approach this spectrum of disclosure, as I mentioned before, depends on characteristics of the market and on the laws of consumer communication.

Coming back to your specific question: do firms know where their products are on this spectrum? I don’t think they know exactly where they are. There’s no equation to figure that out. However, I think good managers have a sense of where things are located. They know when they are entering a market where consumer acceptance is important or when they’re entering one that’s well understood. This is intuition. In a sense, our model is capturing this intuition—the black box of good decisions.