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Half a Century of Public Software Institutions: Open Source as a Solution to Hold-Up Problem

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  • Michael Schwarz
  • Yuri Takhteyev
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    Abstract

    We argue that the intrinsic inefficiency of proprietary software has historically created a space for alternative institutions that provide software as a public good. We discuss several sources of such inefficiency, focusing on one that has not been described in the literature: the underinvestment due to fear of holdup. An inefficient holdup occurs when a user of software must make complementary investments, when the return on such investments depends on future cooperation of the software vendor, and when contracting about a future relationship with the software vendor is not feasible. We also consider how the nature of the production function of software makes software cheaper to develop when the code is open to the end users. Our framework explains why open source dominates certain sectors of the software industry (e.g., the top ten programming languages all have an open source implementation), while being almost none existent in some other sectors (none of the top ten computer games are open source). We then use our discussion of efficiency to examine the history of institutions for provision of public software from the early collaborative projects of the 1950s to the modern "open source" software institutions. We look at how such institutions have created a sustainable coalition for provision of software as a public good by organizing diverse individual incentives, both altruistic and profit-seeking, providing open source products of tremendous commercial importance, which have come to dominate certain segments of the software industry.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14946.

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    Date of creation: May 2009
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    Handle: RePEc:nbr:nberwo:14946

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    1. Josh Lerner & Jean Tirole, 2003. "The Scope of Open Source Licensing," Levine's Working Paper Archive 506439000000000140, David K. Levine.
    2. Guttman, Joel M, 1978. "Understanding Collective Action: Matching Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 251-55, May.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
    4. Lerner, Josh & Tirole, Jean, 2002. "Some Simple Economics of Open," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 197-234, June.
    5. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    6. Bliss, Christopher & Nalebuff, Barry, 1984. "Dragon-slaying and ballroom dancing: The private supply of a public good," Journal of Public Economics, Elsevier, vol. 25(1-2), pages 1-12, November.
    7. Justin Pappas Johnson, 2002. "Open Source Software: Private Provision of a Public Good," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(4), pages 637-662, December.
    8. Eric von Hippel, 2007. "Horizontal innovation networks—by and for users," Industrial and Corporate Change, Oxford University Press, vol. 16(2), pages 293-315, April.
    9. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
    10. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
    11. Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February.
    12. Josh Lerner & Parag A. Pathak & Jean Tirole, 2006. "The Dynamics of Open-Source Contributors," American Economic Review, American Economic Association, vol. 96(2), pages 114-118, May.
    13. Johnson, Justin P., 2006. "Collaboration, peer review and open source software," Information Economics and Policy, Elsevier, vol. 18(4), pages 477-497, November.
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