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Competition and open source with perfect software compatibility

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  • Lanzi, Diego

Abstract

In this paper we study duopolistic competition between closed and open source software. Inspired by recent contributions on open source, we propose a two-stage game with perfect information and product differentiation, in which producers first set software quality and then determine prices (the price is zero for open source programs). We assume perfect software compatibility and model lock-in effects, a network externality component of software quality, and accumulation of experience in software use and implementation. In comparison to the monopolistic benchmark case, we argue that, in a duopoly created by the emergence of an open source program, the proprietary software producer will reduce its selling price if: (i) its network of users is larger than the open source network and its consumers are largely familiar with its program, (ii) it has a small network of unskilled consumers. On the other hand, the price of proprietary software will increase if its users form a large, but poorly-skilled network. Furthermore, we show that, in all of the above cases, the hedonic quality of proprietary software increases. Finally, by modeling experience accumulation processes through difference equations, we show that the ratio between the closed and open source programs' opportunity costs for software learning and deployment plays a crucial role in shaping market outcomes. If open source software remains too complex and technical for unskilled or time-pressed users, a shared market solution, in which both programs are adopted, is likely to emerge. However, if opportunity costs in learning and understanding open source programs are particularly low, or at least equal to the opportunity costs of a closed-source program, then open source dominance emerges (i.e. markets tip to open source).

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Bibliographic Info

Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 21 (2009)
Issue (Month): 3 (August)
Pages: 192-200

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Handle: RePEc:eee:iepoli:v:21:y:2009:i:3:p:192-200

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Web page: http://www.elsevier.com/locate/inca/505549

Related research

Keywords: Open source Software markets Oligopolistic competition Vertical product differentiation;

References

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  1. Nicholas Economides & Evangelos Katsamakas, 2004. "Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry," Working Papers 04-30, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521800952.
  3. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  4. de Laat, Paul B., 2005. "Copyright or copyleft?: An analysis of property regimes for software development," Research Policy, Elsevier, vol. 34(10), pages 1511-1532, December.
  5. Richard Hawkins, 2004. "The economics of open source software for a competitive firm," Netnomics, Springer, vol. 6(2), pages 103-117, June.
  6. Lakhani, Karim R. & von Hippel, Eric, 2003. "How open source software works: "free" user-to-user assistance," Research Policy, Elsevier, vol. 32(6), pages 923-943, June.
  7. Wegberg,M.,van & Berends,P., 2000. "Competing communities of users and developers of computer software: competition between open source software and commercial software," Research Memorandum 001, Maastricht University, Netherlands Institute of Business Organization and Strategy Research (NIBOR).
  8. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Schmidt, Klaus M. & Schnitzer, Monika, 2003. "Public Subsidies for Open Source? Some Economic Policy Issues of the Software Market," CEPR Discussion Papers 3793, C.E.P.R. Discussion Papers.
  10. Dalle, Jean-Michel & Jullien, Nicolas, 2003. "'Libre' software: turning fads into institutions?," Research Policy, Elsevier, vol. 32(1), pages 1-11, January.
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Citations

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Cited by:
  1. Engelhardt, Sebastian v. & Freytag, Andreas, 2013. "Institutions, culture, and open source," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 90-110.
  2. Di Gaetano, Luigi, 2012. "A Model of corporate donations to open source under hardware–software complementarity," MPRA Paper 39849, University Library of Munich, Germany.
  3. Gauguier, Jean-Jacques, 2009. "L’industrialisation de l’Open Source," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/4388 edited by Toledano, Joëlle.
  4. Éric Darmon & Dominique TORRE, 2014. "Open Source, Dual Licensing and Software Competition," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201405, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  5. Francesco Rullani & Lorenzo Zirulia, 2011. "A Supply Side Story for a Threshold Model: Endogenous Growth of the Free and Open Source Community," DRUID Working Papers 11-06, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.

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