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On Platforms, Incomplete Contracts, and Open Source Software

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  • Andras Niedermayer

Abstract

We consider a firm A initially owning a software platform (e.g. operating system) and an application for this platform. The specific knowledge of another firm B is needed to make the platform successful by creating a further application. When B's application is completed, A has incentives to expropriate the rents. Netscape claimed e.g. that this was the case with its browser running on MS Windows. We will argue that open sourcing or standardizing the platform is a warranty for B against expropriation of rents. The different pieces of software are considered as assets in the sense of the property rights literature (see Hart and Moore (Journal of Political Economy, 1990)). Two cases of joint ownership are considered beyond the standard cases of integration and non-integration: platform standardization (both parties can veto changes) and open source (no veto rights). In line with the literature, the more important a party's specific investments the more rights it should have. In contrast to Hart and Moore, however, joint ownership can be optimal in our setting. Open source is optimal if investments in the applications are more important than in the platform. The results are driven by the fact that in our model firms invest in physical (and not in human) capital and that there is non-rivalry in consumption for software.

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Bibliographic Info

Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0707.

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Date of creation: Oct 2007
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Handle: RePEc:ube:dpvwib:dp0707

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Keywords: Platforms; open source; standardization; incomplete contracts; property rights; joint ownership;

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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Annabelle Gawer & Rebecca Henderson, 2005. "Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel," NBER Working Papers 11852, National Bureau of Economic Research, Inc.
  3. Farrell, Joseph & Katz, Michael, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Competition Policy Center, Working Paper Series qt1441h2tj, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  4. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  5. West, Joel, 2003. "How open is open enough?: Melding proprietary and open source platform strategies," Research Policy, Elsevier, vol. 32(7), pages 1259-1285, July.
  6. Rosenkranz, Stephanie & Schmitz, Patrick W., 1999. "Know-how disclosure and incomplete contracts," MPRA Paper 12533, University Library of Munich, Germany.
  7. Stephen M. Maurer & Suzanne Scotchmer, 2006. "Open Source Software: The New Intellectual Property Paradigm," NBER Working Papers 12148, National Bureau of Economic Research, Inc.
  8. Josh Lerner & Jean Tirole, 2004. "The Economics of Technology Sharing: Open Source and Beyond," NBER Working Papers 10956, National Bureau of Economic Research, Inc.
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Cited by:
  1. Llanes, Gastón & de Elejalde, Ramiro, 2013. "Industry equilibrium with open-source and proprietary firms," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 36-49.

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