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Software Innovation and the Open Source threat

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Abstract

In this paper I study how innovation investment in a software duopoly is affected by the fact that one of the firms is, or might become Open Source. Firms can either be proprietary source (PS) or open source (OS) and have different initial technological levels. An OS firm is a for profit organization whose basic software is OS and it is distributed for free. The OS firm, however, is able to make profits from selling complementary software and, on the cost side, it receives development help from a community of users. I first compare a duopoly composed by two PS firms with a mixed duopoly of a PS and OS firm and I find that a PS duopoly might generate more innovation than a mixed duopoly if the initial technological gap between firms is small. However if this gap is large, a PS duopoly generates less innovation than a mixed duopoly. I then extend the setting to allow PS firms to switch to OS or to remain PS. A PS firm wants to become OS if it gets behind enough in the technological race against a competitor. I find that the outside option to become OS might soften competition on innovation since the technological leader prefers to reduce his innovation investment to avoid the OS switch of the follower. Therefore, although the switch to OS could generate higher investment levels ex-post it might generate lower investment ex-ante. In this context I find that a government subsidy to OS firms could be potentially harmful for innovation.

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  • German Lambardi, 2009. "Software Innovation and the Open Source threat," Working Papers 09-15, NET Institute, revised Sep 2009.
  • Handle: RePEc:net:wpaper:0915
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    References listed on IDEAS

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    1. Alexia Gaudeul, 2009. "Consumer Welfare and Market Structure in a Model of Competition between Open Source and Proprietary Software," International Journal of Open Source Software and Processes (IJOSSP), IGI Global, vol. 1(2), pages 43-65, April.
    2. Nicholas Economides & Evangelos Katsamakas, 2005. "Linux vs. Windows: A comparison of application and platform innovation incentives for open source and proprietary software platforms," Working Papers 05-07, NET Institute.
    3. Stefano Comino & Fabio Manenti, 2005. "Government Policies Supporting Open Source Software for the Mass Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(2), pages 217-240, December.
    4. Jürgen Bitzer & Philipp J.H. Schröder, 2005. "The Impact of Entry and Competition by Open Source Software on Innovation Activity," Industrial Organization 0512001, EconWPA.
    5. Eric Darmon & Thomas Le Texier & Dominique Torre, 2007. "Commercial or open source software ? Winner-takes-all cometition, partial adoption and efficiency," Post-Print halshs-00161720, HAL.
    6. Comino, Stefano & Manenti, Fabio M., 2011. "Dual licensing in open source software markets," Information Economics and Policy, Elsevier, vol. 23(3), pages 234-242.
    7. Alexandre Gaudeul, 2004. "Competition between open-source and proprietary software: the (La)TeX case study," Industrial Organization 0409007, EconWPA.
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    More about this item

    Keywords

    Software Market; Open Source; Innovation Incentives;

    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
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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