The Internet-based market is rising as a viable venue for the procurement of innovation solutions. There are two major procurement mechanisms existing in the market practices: contest and RFP. We investigate the factors that affect a firm’s preference of one mechanism over the other. We divide innovation problems into two categories: exploitive innovation problem and exploratory innovation problem. For an exploitive innovation problem, technologies used in solutions already exist, and the outcome of the solution is determined by the type and the effort of a solver. For an exploratory problem, technologies are not available; solvers need to go through an exploratory process but the result of his effort is uncertain. We establish the boundary condition for solution seeker’s decision on procurement mechanism. For an exploitive innovation problem, RFP is preferred in an open-participation market unless the distribution of the solvers’ type has a big variance; for an explorative innovation problem, contest will be preferred in most cases except that the solver pool of the market is small. Moreover, the amount of a cash award, the effort coefficient, and the degree of the randomness endowed in a technology exploratory process all have effect on seekers’ decision.
Ge, Ruyi and Zhang, Pengzhu, "Procuring Innovation on Internet-Based Markets" (2009). ICEB 2009 Proceedings. 23.