Open source software subsidies and network compatibility in a mixed duopoly

Open source software (OSS) generally offers a high-quality alternative to proprietary software (e.g. Linux, Apache, Android, etc.) for many applications. Although OSS is usually free of charge, its diffusion remains limited. Should government intervene to promote the diffusion of OSS, and offer potential adopters some learning or financial support? This paper examines whether public subsidies for OSS are socially desirable, and how the extent of compatibility between OSS and proprietary software (PS) might influence the optimal subsidy offered. We consider a mixed duopoly model in which a PS company competes with an OSS community. Users are heterogeneous in their ability to use OSS, and their utility depends on the number of users who adopt the same or compatible software (existence of network externalities). Four situations are distinguished: full compatibility between OSS and PS, full incompatibility, and one-way compatibility (either only OSS or PS is compatible). We show that if the government places more weight on consumer surplus, public subsidies are welfare-enhancing. But the optimal subsidy level is larger with full compatibility and PS compatibility than full incompatibility and OSS compatibility. These results suggest that government policy towards OSS should be conditional on the degree of compatibility between PS and OSS.