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Open Source vs. Proprietary Software: Competition and Compatibility

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  • Zhaoli Meng

    (National University of Singapore)

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    Abstract

    We use a Hotelling linear city model to study competition between open source and proprietary software, where only the producer of the proprietary software aims at maximizing the profit. The producer of the proprietary software must decide on compatibility. Different compatibility strategies will lead to different network externality, and thus result in different profit for the producer of the proprietary software. We found that the proprietary producer¡¯s choice of compatibility strategy depends on the market coverage conditions. When the market is fully covered, one-way compatibility is the best strategy for the proprietary software. When the market is partly covered, two-way compatibility is the best strategy. Such results are not affected by software quality. Furthermore, when the provider of the open source software pursues the maximum market share rather than reacts passively, two-way compatibility would be the best choice for both the open source and the proprietary software. Moreover, the proprietary software producer does not favor its proprietary rival changing to open source software. Such a change may lower the social welfare.

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    File URL: http://128.118.178.162/eps/io/papers/0508/0508008.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Industrial Organization with number 0508008.

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    Date of creation: 10 Aug 2005
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    Handle: RePEc:wpa:wuwpio:0508008

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    Web page: http://128.118.178.162

    Related research

    Keywords: Open Source Software; Proprietary Software; Compatibility; Competition;

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    1. Cremer, H. & Marchand, M. & Thisse, J.-F., 1987. "The public firm as an instrument for regulating an oligopolistic market," CORE Discussion Papers 1987010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
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