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Mixed Source

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  • Ramon Casadesus-Masanell

    () (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

  • Gastón Llanes

    () (Escuela de Administración, Pontificia Universidad Católica de Chile, Vicuna Mackenna 4860, Macul, Santiago, Chile)

Abstract

We study competitive interaction between a profit-maximizing firm that sells software and complementary services, and a free open-source competitor. We examine the firm's choice of business model between the proprietary model (where all software modules are proprietary), the open-source model (where all modules are open source), and the mixed-source model (where some--but not all--modules are open). When a module is opened, users can access and improve the code, which increases quality and value creation. Opened modules, however, are available for others to use free of charge. We derive the set of possibly optimal business models when the modules of the firm and the open-source competitor are compatible (and thus can be combined) and incompatible, and show that (i) when the firm's modules are of high (low) quality, the firm is more open under incompatibility (compatibility) than under compatibility (incompatibility); (ii) firms are more likely to open substitute, rather than complementary, modules to existing open-source projects; and (iii) there may be no trade-off between value creation and value capture when comparing business models with different degrees of openness. This paper was accepted by Bruno Cassiman, business strategy.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1353
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 7 (July)
Pages: 1212-1230

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:7:p:1212-1230

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Related research

Keywords: open source; user innovation; business models; complementarity; compatibility; value creation; value capture;

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References

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  1. Gastón Llanes & Ramiro de Elejalde, 2009. "Industry Equilibrium with Open Source and Proprietary Firms," Harvard Business School Working Papers 09-149, Harvard Business School.
  2. Nicholas Economides & Evangelos Katsamakas, 2004. "Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry," Working Papers 04-22, NET Institute, revised Aug 2004.
  3. Ramon Casadesus-Masanell & Pankaj Ghemawat, 2006. "Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows," Management Science, INFORMS, vol. 52(7), pages 1072-1084, July.
  4. Adam Brandenburger & Harborne Stuart, 2007. "Biform Games," Management Science, INFORMS, vol. 53(4), pages 537-549, April.
  5. Chen, M. Keith & Nalebuff, Barry, 2006. "One-Way Essential Complements," Working Papers 22, Yale University, Department of Economics.
  6. Glenn MacDonald & Michael D. Ryall, 2004. "How Do Value Creation and Competition Determine Whether a Firm Appropriates Value?," Management Science, INFORMS, vol. 50(10), pages 1319-1333, October.
  7. Keith M. Chen & Barry Nalebuff, 2006. "One-Way Essential Complements," Levine's Bibliography 321307000000000669, UCLA Department of Economics.
  8. Adam M. Brandenburger & Harborne W. Stuart, 1996. "Value-based Business Strategy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(1), pages 5-24, 03.
  9. Richard P. Bagozzi & Utpal M. Dholakia, 2006. "Open Source Software User Communities: A Study of Participation in Linux User Groups," Management Science, INFORMS, vol. 52(7), pages 1099-1115, July.
  10. Ramon Casadesus-Masanell & Feng Zhu, 2010. "Strategies to Fight Ad-Sponsored Rivals," Management Science, INFORMS, vol. 56(9), pages 1484-1499, September.
  11. Carliss Y. Baldwin & Kim B. Clark, 2006. "The Architecture of Participation: Does Code Architecture Mitigate Free Riding in the Open Source Development Model?," Management Science, INFORMS, vol. 52(7), pages 1116-1127, July.
  12. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  13. Sebastian von Engelhardt, 2010. "Quality Competition or Quality Cooperation? License-Type and the Strategic Nature of Open Source vs. Closed Source Business Models," Jena Economic Research Papers 2010-034, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  14. Josh Lerner & Jean Tirole, 2004. "The Economics of Technology Sharing: Open Source and Beyond," NBER Working Papers 10956, National Bureau of Economic Research, Inc.
  15. Bitzer, Jurgen, 2004. "Commercial versus open source software: the role of product heterogeneity in competition," Economic Systems, Elsevier, vol. 28(4), pages 369-381, December.
  16. Alexandre Gaudeul, 2004. "Competition between open-source and proprietary software: the (La)TeX case study," Industrial Organization 0409007, EconWPA.
  17. Joachim Henkel, 2006. "The Jukebox Mode of Innovation - a Model of Commercial Open Source Development," DRUID Working Papers 06-25, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  18. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x.
  19. Ramon Casadesus-Masanell & David B. Yoffie, 2007. "Wintel: Cooperation and Conflict," Management Science, INFORMS, vol. 53(4), pages 584-598, April.
  20. Jeffrey A. Roberts & Il-Horn Hann & Sandra A. Slaughter, 2006. "Understanding the Motivations, Participation, and Performance of Open Source Software Developers: A Longitudinal Study of the Apache Projects," Management Science, INFORMS, vol. 52(7), pages 984-999, July.
  21. Ramon Casadesus-Masanell & Andres Hervas-Drane, 2010. "Peer-to-Peer File Sharing and the Market for Digital Information Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 333-373, 06.
  22. Fosfuri, Andrea & Giarratana, Marco S. & Luzzi, Alessandra, 2008. "The penguin has entered the building: the commercialization of open source software products," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/6668, Universidad Carlos III de Madrid.
  23. Sonali K. Shah, 2006. "Motivation, Governance, and the Viability of Hybrid Forms in Open Source Software Development," Management Science, INFORMS, vol. 52(7), pages 1000-1014, July.
  24. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  25. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  26. Georg von Krogh & Eric von Hippel, 2006. "The Promise of Research on Open Source Software," Management Science, INFORMS, vol. 52(7), pages 975-983, July.
  27. Andrea Bonaccorsi & Silvia Giannangeli & Cristina Rossi, 2006. "Entry Strategies Under Competing Standards: Hybrid Business Models in the Open Source Software Industry," Management Science, INFORMS, vol. 52(7), pages 1085-1098, July.
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