Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry
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.Download Info
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Paper 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
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;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, 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.
- 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.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Van Cayseele, Patrick & Reynaerts, Jo, 2007.
"Complementary platforms,"
Open Access publications from Katholieke Universiteit Leuven
urn:hdl:123456789/120435, Katholieke Universiteit Leuven.
- Patrick Van Cayseele & Jo Reynaerts, 2011. "Complementary Platforms," Review of Network Economics, De Gruyter, vol. 10(1), pages 2.
- Patrick VAN CAYSEELE & Jo REYNAERTS, 2007. "Complementary platforms," Center for Economic Studies - Discussion papers ces0721, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Jo Reynaerts & Patrick Van Cayseele, 2007. "Complementary Platforms," LICOS Discussion Papers 18607, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
- Van Cayseele, Patrick & Reynaerts, Jo, 2011. "Complementary platforms," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/302751, Katholieke Universiteit Leuven.
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"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.
- Gaudeul, Alexia, 2008. "Consumer welfare and market structure in a model of competition between open source and proprietary software," MPRA Paper 19555, University Library of Munich, Germany.
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- Ramon Casadesus-Masanell & Gaston Llanes, 2009.
"Mixed Source,"
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09-06, NET Institute, revised Sep 2009.
- Ramon Casadesus-Masanell & Gastón Llanes, 2011. "Mixed Source," Management Science, INFORMS, vol. 57(7), pages 1212-1230, July.
- 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.
- 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.
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"Determinants of proactive and reactive technology licensing: A contingency perspective,"
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Elsevier, vol. 39(1), pages 55-66, February.
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"Net Neutrality on the Internet: A Two-sided Market Analysis,"
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07-45, NET Institute, revised Nov 2007.
- Economides, Nicholas & Tåg, Joacim, 2012. "Network neutrality on the Internet: A two-sided market analysis," Information Economics and Policy, Elsevier, vol. 24(2), pages 91-104.
- Economides, Nicholas & Tåg, Joacim, 2008. "Network Neutrality on the Internet: A Two-sided Market Analysis," Working Paper Series 727, Research Institute of Industrial Economics, revised 09 Nov 2011.
- Nicholas Economides & Joacim Tåg, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-14, NET Institute, revised Sep 2007.
- Chris Edmond, 2007. "Information Revolutions and the Overthrow of Autocratic Regimes," Working Papers 07-26, New York University, Leonard N. Stern School of Business, Department of Economics.
- Michael Vogelsang, 2010. "Dynamics of two-sided internet markets," International Economics and Economic Policy, Springer, vol. 7(1), pages 129-145, May.
- 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.
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11-06, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
- F. Rullani & L. Zirulia, 2011. "A supply side story for a threshold model: Endogenous growth of the free and open source community," Working Papers wp781, Dipartimento Scienze Economiche, Universita' di Bologna.
- 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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