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Competition and open source with perfect software compatibility

  • Lanzi, Diego

In this paper we study duopolistic competition between closed and open source software. Inspired by recent contributions on open source, we propose a two-stage game with perfect information and product differentiation, in which producers first set software quality and then determine prices (the price is zero for open source programs). We assume perfect software compatibility and model lock-in effects, a network externality component of software quality, and accumulation of experience in software use and implementation. In comparison to the monopolistic benchmark case, we argue that, in a duopoly created by the emergence of an open source program, the proprietary software producer will reduce its selling price if: (i) its network of users is larger than the open source network and its consumers are largely familiar with its program, (ii) it has a small network of unskilled consumers. On the other hand, the price of proprietary software will increase if its users form a large, but poorly-skilled network. Furthermore, we show that, in all of the above cases, the hedonic quality of proprietary software increases. Finally, by modeling experience accumulation processes through difference equations, we show that the ratio between the closed and open source programs' opportunity costs for software learning and deployment plays a crucial role in shaping market outcomes. If open source software remains too complex and technical for unskilled or time-pressed users, a shared market solution, in which both programs are adopted, is likely to emerge. However, if opportunity costs in learning and understanding open source programs are particularly low, or at least equal to the opportunity costs of a closed-source program, then open source dominance emerges (i.e. markets tip to open source).

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Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 21 (2009)
Issue (Month): 3 (August)
Pages: 192-200

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Handle: RePEc:eee:iepoli:v:21:y:2009:i:3:p:192-200
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505549

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  1. Lakhani, Karim R. & von Hippel, Eric, 2003. "How open source software works: "free" user-to-user assistance," Research Policy, Elsevier, vol. 32(6), pages 923-943, June.
  2. Richard Hawkins, 2004. "The economics of open source software for a competitive firm," Netnomics, Springer, vol. 6(2), pages 103-117, June.
  3. Dalle, Jean-Michel & Jullien, Nicolas, 2003. "'Libre' software: turning fads into institutions?," Research Policy, Elsevier, vol. 32(1), pages 1-11, January.
  4. 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.
  5. Schmidt, Klaus M. & Schnitzer, Monika, 2003. "Public Subsidies for Open Source? Some Economic Policy Issues of the Software Market," CEPR Discussion Papers 3793, C.E.P.R. Discussion Papers.
  6. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  7. repec:cup:cbooks:9780521800952 is not listed on IDEAS
  8. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  9. Wegberg,M.,van & Berends,P., 2000. "Competing communities of users and developers of computer software: competition between open source software and commercial software," Research Memorandum 001, Maastricht University, Netherlands Institute of Business Organization and Strategy Research (NIBOR).
  10. repec:cup:cbooks:9780521805001 is not listed on IDEAS
  11. de Laat, Paul B., 2005. "Copyright or copyleft?: An analysis of property regimes for software development," Research Policy, Elsevier, vol. 34(10), pages 1511-1532, December.
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