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Competition and open source with perfect software compatibility

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  • Lanzi, Diego

Abstract

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).

Suggested Citation

  • Lanzi, Diego, 2009. "Competition and open source with perfect software compatibility," Information Economics and Policy, Elsevier, vol. 21(3), pages 192-200, August.
  • Handle: RePEc:eee:iepoli:v:21:y:2009:i:3:p:192-200
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    References listed on IDEAS

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    1. 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.
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    Citations

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    Cited by:

    1. Eric Darmon & Dominique Torre, 2010. "Open source, dual licensing and software compétition," Post-Print halshs-00497623, HAL.
    2. Gauguier, Jean-Jacques, 2009. "L’industrialisation de l’Open Source," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/4388 edited by Toledano, Joëlle, June.
    3. Engelhardt, Sebastian v. & Freytag, Andreas, 2013. "Institutions, culture, and open source," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 90-110.
    4. Comino, Stefano & Manenti, Fabio M., 2011. "Dual licensing in open source software markets," Information Economics and Policy, Elsevier, vol. 23(3), pages 234-242.
    5. Luigi Di Gaetano, 2015. "A Model of corporate donations to open source under hardware–software complementarity," Industrial and Corporate Change, Oxford University Press, vol. 24(1), pages 163-190.
    6. F. Rullani & L. Zirulia, 2011. "A supply side story for a threshold model: Endogenous growth of the free and open source community," Working Papers wp781, Dipartimento Scienze Economiche, Universita' di Bologna.
    7. Thomas Le Texier & Mourad Zeroukhi, 2015. "How Can Proprietary Software Firms Take Advantage Over Open Source Communities? Another Story of Pro fitable Piracy," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201503, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    8. Yu Wang & Yu Chen & Bonwoo Koo, 2017. "Open Source and Competition Strategy Under Network Effects," Graz Economics Papers 2017-03, University of Graz, Department of Economics.
    9. Stefano Colombo & Luca Grilli & Cristina Rossi-Lamastra, 2014. "Network Externalities, Incumbent’s Competitive Advantage and the Degree of Openness of Software Start-Ups," Computational Economics, Springer;Society for Computational Economics, vol. 44(2), pages 175-200, August.

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