Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry
AbstractTechnology 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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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 04-22.
Length: 34 pages
Date of creation: Aug 2004
Date of revision: Aug 2004
Contact details of provider:
Web page: http://www.NETinst.org/
networks; network effects; network externalities; complements; technology platforms; software industry structure; open source software;
Other versions of this item:
- Nicholas Economides & Evangelos Katsamakas, 2006. "Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry," Management Science, INFORMS, vol. 52(7), pages 1057-1071, July.
- Nicholas Economides & Evangelos Katsamakas, 2005. "Two-sided competition of proprietary vs. open source technology platforms, and the implications for the software industry," Working Papers 05-02, NET Institute, revised Oct 2005.
- 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.
- Nicholas Economides & Evangelos Katsamakas, 2005. "Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry," Working Papers 05-06, NET Institute.
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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