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Open Source Software Subsidies and Network Compatibility in a Mixed Duopoly

  • Thierry Pénard

    (University of Rennes 1, CREM CNRS UMR 6211 and IDEC)

  • Mourad Zeroukhi

    (Foundation of the University of Rennes 1, CREM CNRS UMR 6211 and IDEC)

For many applications, open source software (OSS) can offer a high-quality alternative to proprietary software (e.g. Linux, Apache, Android,...). But even if OSS is usually free of charge, its installation and use require some skills. Should the government intervene to promote the diffusion of OSS and provide some learning or financial support to potential adopters? This paper examines whether public subsidies towards open source software is socially desirable and how the extent of compatibility between open source software and proprietary software can influence the amount of subsidies. We consider a mixed duopoly model in which a proprietary software (PS) company competes with an open source software (OSS) community. Users are heterogeneous in their ability to use OSS, and their utility depends on the number of users who have adopted the same software or a compatible software (existence of network externalities). Four situations are distinguished: full compatibility between OSS and PS, full incompatibility, and one-way compatibility (either only OSS or PS is compatible). We show that if the government only takes care of consumer surplus, public subsidies are welfare-enhancing. But the optimal level of subsidies is larger with full compatibility and PS compatibility than full incompatibility and OSS compatibility. These results suggest that government policy towards OSS must be conditional to the degree of compatibility between PS and OSS.

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Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201339.

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Date of creation: Nov 2013
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Handle: RePEc:tut:cremwp:201339
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  1. 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.
  2. Schmidt, Klaus M. & Schnitzer, Monika, 2003. "Public Subsidies for Open Source? Some Economic Policy Issues of the Software Market," CEPR Discussion Papers 3793, C.E.P.R. Discussion Papers.
  3. 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.
  4. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  5. Bonaccorsi, Andrea & Rossi, Cristina, 2003. "Why Open Source software can succeed," Research Policy, Elsevier, vol. 32(7), pages 1243-1258, July.
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