IDEAS home Printed from https://ideas.repec.org/p/grz/wpaper/2017-03.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: http://www100.uni-graz.at/vwlwww/forschung/RePEc/wpaper/2017-03.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters,in: Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74 Edward Elgar Publishing.
    2. Oz Shy & Jacques-Françlois Thisse, 1999. "A Strategic Approach to Software Protection," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(2), pages 163-190, June.
    3. Neil Gandal, 2002. "Compatibility, Standardization, and Network Effects: Some Policy Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 18(1), pages 80-91, Spring.
    4. Bitzer, Jurgen, 2004. "Commercial versus open source software: the role of product heterogeneity in competition," Economic Systems, Elsevier, vol. 28(4), pages 369-381, December.
    5. Llanes, Gastón & de Elejalde, Ramiro, 2013. "Industry equilibrium with open-source and proprietary firms," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 36-49.
    6. Mustonen, Mikko, 2003. "Copyleft--the economics of Linux and other open source software," Information Economics and Policy, Elsevier, vol. 15(1), pages 99-121, March.
    7. Ramon Casadesus-Masanell & Pankaj Ghemawat, 2006. "Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows," Management Science, INFORMS, vol. 52(7), pages 1072-1084, July.
    8. Lanzi, Diego, 2009. "Competition and open source with perfect software compatibility," Information Economics and Policy, Elsevier, vol. 21(3), pages 192-200, August.
    9. Ashish Arora & Farasat A. S. Bokhari, 2007. "OPEN VERSUS CLOSED FIRMS AND THE DYNAMICS OF INDUSTRY EVOLUTION -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 55(3), pages 499-527, September.
    10. Mikko Mustonen, 2005. "When Does a Firm Support Substitute Open Source Programming?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 121-139, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Hotelling model; packaged goods; network effect; forward-looking consumers;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:grz:wpaper:2017-03. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael Scholz). General contact details of provider: http://edirc.repec.org/data/vgrazat.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.