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. 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 applications 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 applications, and the platform access fee for applications may be below marginal cost, and we characterize demand conditions that lead to this. The proprietary applications sector of an industry based on an open source platform may be more profitable than the total profits of a proprietary platform industry. When users have a strong preference for application variety, the total profits of the proprietary industry are larger than the total profits of an industry based on an open source platform. The variety of applications is larger when the platform is open source. When a system based on an open source platform with an independent proprietary application competes with a proprietary system, the proprietary system is likely to dominate the open source platform industry both in terms of market share and profitability. This may explain the dominance of Microsoft in the market for PC operating systems.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 05-06.
Length: 35 pages
Date of creation: Oct 2005
Date of revision:
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Web page: http://www.NETinst.org/
networks; network effects; network externalities; complements; systems; open source software; technology platforms; software industry structure;
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 04-22, NET Institute, revised Aug 2004.
- 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 05-02, NET Institute, revised Oct 2005.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-26 (All new papers)
- NEP-COM-2006-08-26 (Industrial Competition)
- NEP-ICT-2006-08-26 (Information & Communication Technologies)
- NEP-INO-2006-08-26 (Innovation)
- NEP-MIC-2006-08-26 (Microeconomics)
- NEP-NET-2006-08-26 (Network Economics)
- NEP-TID-2006-08-26 (Technology & Industrial Dynamics)
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