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On substitution of intellectual property and free disclosure: an analysis of R&D strategies in software technologies

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  • Elad Harison
  • Robin Cowan

Abstract

Major firms have joined the open-source movement and have chosen to apply that development methodology in their projects. Our model examines the links between openness and innovation in software technologies by revealing how disclosure affects the technical quality of computer applications and the profits of myopic and far-sighted firms. The model analyzes the degree of disclosure that should be implemented to optimize profits in various market scenarios. Further, we reveal how social welfare of users (in terms of technical quality of the products that they implement) relates to profit-maximization decisions of the firm. If revenue is unresponsive to openness or slowly responds to it, the firm would prefer to leave the source code proprietary. Otherwise, if the market conditions change and the effective revenue increases rapidly enough with openness, the optimal strategy changes from entirely proprietary to some open-source development.

Suggested Citation

  • Elad Harison & Robin Cowan, 2004. "On substitution of intellectual property and free disclosure: an analysis of R&D strategies in software technologies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 13(5), pages 477-487.
    • Handle: RePEc:taf:ecinnt:v:13:y:2004:i:5:p:477-487
    DOI: 10.1080/1043859042000253581
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    References listed on IDEAS

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    1. Josh Lerner & Jean Tirole, 2002. "Some Simple Economics of Open Source," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 197-234, June.
    2. Hertel, Guido & Niedner, Sven & Herrmann, Stefanie, 2003. "Motivation of software developers in Open Source projects: an Internet-based survey of contributors to the Linux kernel," Research Policy, Elsevier, vol. 32(7), pages 1159-1177, July.
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    Cited by:

    1. Engelhardt, Sebastian v. & Freytag, Andreas, 2013. "Institutions, culture, and open source," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 90-110.
    2. Harison, Elad & Koski, Heli, 2010. "Applying open innovation in business strategies: Evidence from Finnish software firms," Research Policy, Elsevier, vol. 39(3), pages 351-359, April.
    3. Michael Fritsch & Sebastian von Engelhardt, 2010. "Who Starts with Open Source? Institutional Choice of Start-Ups in the German ICT Sector," Jena Economics Research Papers 2010-049, Friedrich-Schiller-University Jena.
    4. Sebastian von Engelhardt, 2010. "Quality Competition or Quality Cooperation? License-Type and the Strategic Nature of Open Source vs. Closed Source Business Models," Jena Economics Research Papers 2010-034, Friedrich-Schiller-University Jena.

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