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Open Source and Competition Strategy Under Network Effects

Author

Listed:
  • Yu Wang

    (School of Economics, Nanjing University)

  • Yu Chen

    (University of Graz)

  • Bonwoo Koo

    (University of Waterloo)

Abstract

This study analyzes a firm’s decision to adopt an open source strategy in the development of a primary system product that has an indirect network effect on complementary accessory products, and evaluates its impact on market competition and social welfare. It shows that firms are likely to switch from a proprietary development strategy to an open source strategy as the network effect decreases, and a firm’s strategy also depends on consumers’ attitude toward future utility. This result implies that the presence of open source systems can benefit proprietary firms due to consumers’ higher willingness-to-pay for accessory products, and can lead to greater industry profit and social welfare. This study also shows that when the system development cost is non-negligible, firms prefer an open source strategy due to the cost-saving effect, but society is worse off due to a fragmented market with multiple system products.

Suggested Citation

  • 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.
    • Handle: RePEc:grz:wpaper:2017-03
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    References listed on IDEAS

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    More about this item

    Keywords

    Hotelling model; packaged goods; network effect; forward-looking consumers;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • 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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