Product Strategy for Commercial Open Source Software (original) (raw)
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Competitive Strategy for Open Source Software
Marketing Science, 2011
Commercial open source software (COSS) products-privately developed software based on publicly available source code-represent a rapidly growing, multi-billion dollar market. A unique aspect of competition in the COSS market is that many open source licenses require firms to make certain enhancements public, creating an incentive for firms to free-ride on the contributions of others. This practice raises a number of puzzling issues. First, why should a firm further develop a product if competitors can freely appropriate these contributions? Second, how does a market based on freeriding produce products that effectively compete with similar products from proprietary software firms? Third, from a public policy perspective, does the mandatory sharing of enhancements raise or lower consumer surplus?
2010
In the ICT sector, product-software is an important factor for the quality of the products (e.g. cell phones). In this context, open source software enables firms to avoid quality competition as they can cooperate on quality without an explicit contract. The economics of open source (OS) versus closed source (CS) business models are analyzed in a general two-stage model that combines aspects of noncooperative R&D with the theory of differentiated oligopolies: In stage one, firms develop software, either as OS or CS, or as a an OS-CS-mix if the license allows. In stage two, firms bundle this with complementary products and compete à la Cournot. The model allows for horizontal product differentiation in stage two. The finding are: 1.) While CS-decisions are always strategic substitutes, OS-decisions can be strategic complements. Furthermore, CS is a strategic substitute to OS and vice versa. 2.) The type of OS-license plays a crucial role: only if the license prohibits a direct OS-CS code mix (like the GPL), then Nash-equilibria with firms producing OS code exist for all parameters. 3.) In the equilibrium of a mixed industry with restricted licenses, OS-firms offer lower quality than their CS-rivals.
Proprietary or open source software? Winner-takes-all competition, partial adoption and efficiency
Revue d’économie industrielle, 2011
This paper examines the diffusion of both commercial software and open source software (OSS). To do so, we define a two-step game model where the producer of commercial software plays first, by choosing price and quality level, and potential users play second, by adopting whether commercial software, OSS or neither. We find that a winner-takes-all competition may arise between the two types of software, which may lead to the crowding out of one of them. The strategy of the firm can be then understood as a trade-off between a low pricehigh quality and a high price-low quality strategy. Welfare issues are also studied, as we find that the presence of credible OSS improves the utility of users, and that OSS diffusion generate conflicts of interests in some cases.
Technology platforms, such as Microsoft Windows, are the hubs of technology industries. We develop a framework to characterize the optimal two-sided pricing strategy of a platform firm; that is, the pricing strategy toward the direct users of the platform as well as toward firms offering applications that are complementary to the platform. We compare industry structures based on a proprietary platform (such as Windows) with those based on an open source platform (such as Linux), and analyze the structure of competition and industry implications in terms of pricing, sales, profitability, and social welfare. We find that, when the platform is proprietary, the equilibrium prices for the platform, the applications, and the platform access fee for applications may be below marginal cost, and we characterize demand conditions that lead to this. The proprietary applications sector of an industry based on an open source platform may be more profitable than the total profits of a proprietary platform industry. When users have a strong preference for application variety, the total profits of the proprietary industry are larger than the total profits of an industry based on an open source platform. The variety of applications is larger when the platform is open source. When a system based on an open source platform with an independent proprietary application competes with a proprietary system, the proprietary system is likely to dominate the open source platform industry both in terms of market share and profitability. This may explain the dominance of Microsoft in the market for PC operating systems.
Industry equilibrium with open-source and proprietary firms
International Journal of Industrial Organization, 2013
We present a model of industry equilibrium to study the coexistence of Open Source (OS) and Proprietary (P) firms. Two novel aspects of the model are: (1) participation in OS arises as the optimal decision of profit-maximizing firms, and (2) OS and P firms may (or may not) coexist in equilibrium. Firms decide their type and investment in R&D, and sell packages composed of a primary good (like software) and a complementary private good. The only difference between both kinds of firms is that OS share their technological advances on the primary good, while P keep their innovations private. The main contribution of the paper is to determine conditions under which OS and P coexist in equilibrium. Interestingly, this equilibrium is characterized by an asymmetric market structure, with a few large P firms and many small OS firms.
Open Source Versus Closed Source: Software Quality in Monopoly and Competitive Markets
IEEE Transactions on Systems, Man, and Cybernetics - Part A: Systems and Humans, 2005
The open source model of software development has received substantial attention in the industry and popular media; nevertheless, critics frequently contend that open source softwares are inferior in quality compared to closed source softwares because of lack of incentives and project management, while proponents argue the opposite. This paper examines this quality debate by modeling and analyzing software quality, demand, profitability, and welfare under open and closed source environments in monopoly and competitive markets. The results show no dominant quality advantage of one method over another under all circumstances. Both open source and closed source qualities decrease in a competitive market. Conditions under which each method can generate higher quality software are examined.
Mechanism design to promote free market and open source software innovation
2005
Recent developments have challenged one prevailing interpretation of the idea that proprietary systems, enshrined in copyright, create the greatest value. The challenge appears at one level among economic strategists who assert that the greatest value in information goods is not created by the strongest and most restrictive intellectual property protection and in another form by the proponents of Open Source Software who argue for value created by peer review and openly modifiable shared code. We articulate a balance of incentives as indexed by the length of time that software remains proprietary, and openness as indexed by the amount of the platform code base that an author releases to the developer community (and users) to promote the creation of new products. We analyze the trade-off between early and late release based on two novel approaches. The first is a two-sided network externality that explores how the release of free information benefits those who develop as well as those who consume. The second is a framing innovation that places existing licenses in a space that suggests where unexplored socially optimal licenses might exist. Neither technique requires the other and the contribution of each can stand on its own. The combination, however, offers the potential for advancement in a debate where many important trade-offs are often omitted to make analysis tractable.
Economics of Open Source Software
IEEE International Conference on Management of Innovation and Technology, 2001
A simple model of open source software (as typified by the Linux operating system) is presented. Individual user-programmers decide whether to invest their valuable time and effort to develop a software application that will become a public good if so developed. Open source code potentially allows the entire Internet community to use its combined programming knowledge, creativity and expertise. On the other hand, the lack of a profit motive can result in free riding by individuals and, consequently, unrealized developments. Both the level and distribution of open source development effort are generally inefficient. The benefits and drawbacks of open source versus profit-driven development are presented. The effect of changing the population size of user-programmers is considered; finite and asymptotic results are given. Whether the amount of development will increase when applications have a "modular structure" depends on whether the developer base exceeds a critical size or not. Explanations of several stylized facts about open source software development are given, including why certain useful programs don't get written. Other issues are also explored. * This paper is an extension of a chapter from my 1999 M.I.T. Ph.D. dissertation. I thank Daron Acemoglu, Travis Broughton, Jonathan Dworak, Frank Fisher, David P. Myatt, two anonymous referees and a coeditor for helpful comments and advice. I especially thank Glenn Ellison for his extensive and concise remarks.