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Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry

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Author Info

  • Nicholas Economides

    () (Stern School of Business, NYU)

  • Evangelos Katsamakas

    () (School of Business at Fordham University)

Abstract

Technology platforms, such as Microsoft Windows, are the hubs of technology industries. The strategic behavior of a firm controlling a platform affects crucially industry evolution. We develop a framework to characterize the optimal two-sided pricing strategy of a platform firm, that is, the pricing strategy towards the direct users of the platform as well as towards firms offering components 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 application(s), and the platform access fee for applications can sometimes be below marginal cost, and we characterize demand conditions that lead to this. We find that the social welfare in the software industry may be higher when the platform is open source rather than proprietary and the cost of adopting the open source platform is small. The proprietary applications sector of an open source industry is more profitable than the total profits of a proprietary platform industry when the demand of the proprietary platform is not much stronger than the demand for the application(s) and the own-price effect of the platform is strong (demand for the platform is relatively elastic) while the own-price effect of the application is weak (demand for the application is relatively inelastic). When a system based on an open source platform with an independent proprietary application competes with a proprietary platform with an independent application, the open source system is typically dominant in terms of market share.

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File URL: http://www.netinst.org/Two-sided.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 04-22.

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Length: 34 pages
Date of creation: Aug 2004
Date of revision: Aug 2004
Handle: RePEc:net:wpaper:0422

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Web page: http://www.NETinst.org/

Related research

Keywords: networks; network effects; network externalities; complements; technology platforms; software industry structure; open source software;

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Citations

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Cited by:
  1. Van Cayseele, Patrick & Reynaerts, Jo, 2007. "Complementary platforms," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/120435, Katholieke Universiteit Leuven.
  2. Alexia Gaudeul, 2008. "Consumer Welfare and Market Structure in a Model of Competition Between Open Source and Proprietary Software," Working Papers 08-31, Centre for Competition Policy, University of East Anglia.
  3. Krishnamurthy, Sandeep & Tripathi, Arvind K., 2009. "Monetary donations to an open source software platform," Research Policy, Elsevier, vol. 38(2), pages 404-414, March.
  4. Ramon Casadesus-Masanell & Gaston Llanes, 2009. "Mixed Source," Working Papers 09-06, NET Institute, revised Sep 2009.
  5. 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.
  6. Claudio Vitari & Aurelio Ravarini, 2009. "A Longitudinal Analysis of Trajectory Changes in the Software Industry: The Case of the Content Management Application Segment," Post-Print hal-00462408, HAL.
  7. Lichtenthaler, Ulrich, 2010. "Determinants of proactive and reactive technology licensing: A contingency perspective," Research Policy, Elsevier, vol. 39(1), pages 55-66, February.
  8. Andreas Freytag & Sebastian von Engelhardt, 2010. "Institutions, Culture, and Open Source," Jena Economic Research Papers 2010-010, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  9. Nicholas Economides & Joacim Tåg, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-45, NET Institute, revised Nov 2007.
  10. Michael Vogelsang, 2010. "Dynamics of two-sided internet markets," International Economics and Economic Policy, Springer, vol. 7(1), pages 129-145, May.
  11. Bitzer, Jürgen & Geishecker, Ingo, 2010. "Who contributes voluntarily to OSS? An investigation among German IT employees," Research Policy, Elsevier, vol. 39(1), pages 165-172, February.
  12. 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.
  13. Richard Gretz, 2010. "Console Price and Software Availability in the Home Video Game Industry," Atlantic Economic Journal, International Atlantic Economic Society, vol. 38(1), pages 81-94, March.

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