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Software Innovation and the Open Source threat

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    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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    File URL: http://www.netinst.org/Lambardi_09-15.pdf
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    Paper provided by NET Institute in its series Working Papers with number 09-15.

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    Length: 31 pages
    Date of creation: Sep 2009
    Date of revision: Sep 2009
    Handle: RePEc:net:wpaper:0915
    Contact details of provider: Web page: http://www.NETinst.org/

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    1. Stefano Comino & Fabio M. Manenti, 2007. "Dual licensing in open source software markets," Department of Economics Working Papers 0718, Department of Economics, University of Trento, Italia.
    2. Alexandre Gaudeul, 2004. "Competition between open-source and proprietary software: the (La)TeX case study," Industrial Organization 0409007, EconWPA.
    3. Gaudeul, Alexia, 2008. "Consumer welfare and market structure in a model of competition between open source and proprietary software," MPRA Paper 19555, University Library of Munich, Germany.
    4. Linus Dahlander, 2005. "Appropriation And Appropriability In Open Source Software," International Journal of Innovation Management (ijim), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 259-285.
    5. Stefano Comino & Fabio Manenti, 2005. "Government Policies Supporting Open Source Software for the Mass Market," Review of Industrial Organization, Springer, vol. 26(2), pages 217-240, December.
    6. 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 05-03, NET Institute, revised Sep 2005.
    7. Jürgen Bitzer & Philipp J.H. Schröder, 2005. "The Impact of Entry and Competition by Open Source Software on Innovation Activity," Industrial Organization 0512001, EconWPA.
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