Trade-offs to using standardized tools: Innovation enablers or creativity constraints?

Research Summary: In platform ecosystems, the creation of new products is often based on standardized development tools. Complementors often have a choice between either using these tools or creating the functionality themselves. In this paper, we study how the use of standardized development tools is related to the type of products created. By using data on the use of middleware (e.g., game engines) in the console video game market, we show that the use of development tools is associated with products that are less novel but with higher sales on average. We exploit a policy change that affected the ability of U.S.-based developers to hire foreign workers as an instrument for the use of development tools and find further support for these patterns. Managerial Abstract: When developing new products, firms often have to decide whether they base their technology on preexisting components and standardized tools or develop that technology themselves. In general, it has not been clear how using standardized third-party tools that may be available to all firms in an industry affects the nature of the products that are created. Using data on middleware components, such as game engines, in the console video game industry, this paper shows the use of such standardized tools is associated with the creation of products that are less novel but generate higher sales on average. This is an important strategic consideration for firms, but also for platforms that make decisions regarding whether such tools should be allowed on their platform.