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Network Externalities, Incumbent’s Competitive Advantage and the Degree of Openness of Software Start-Ups

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  • Stefano Colombo
  • Luca Grilli
  • Cristina Rossi-Lamastra

    ()

Abstract

This paper proposes a formal model that analyzes the degree of openness chosen by start-ups when entering the software industry. In line with the literature, we label as degree of openness the extent to which software start-ups mix open source (OS) and proprietary solutions in the portfolio of software products they offer. We relate the choice of the degree of openness to two key characteristics of the market segments in which software start-ups operate: the strength of the network externalities and the competitive advantage of the incumbent. Specifically, by modelling (price) competition between an incumbent and an entrant in two ways, i.e., the entrant is price-setter or price-taker, we derive the necessary condition(s) in terms of the strength of network externalities for observing the adoption of a business model that comprises the offering of both proprietary and OS solutions by the entrant (i.e., hybrid business model). Then, we highlight that, if a hybrid business model is the choice, the degree of openness chosen in equilibrium increases along with both the strength of the network externalities and the competitive advantage of the incumbent. This result holds indifferently whether the software start-up is modelled as a price-setter or a price-taker. An empirical test run on a sample of European start-ups in the software industry supports these theoretical predictions. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • 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.
  • Handle: RePEc:kap:compec:v:44:y:2014:i:2:p:175-200
    DOI: 10.1007/s10614-013-9385-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Open source; Software start-ups; Degree of openness; Network externalities; Incumbent’s competitive advantage; L13; L17; L86;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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