Dual licensing strategy with open source competition

Abstract

Software firms that produce and sell proprietary software can use dual licensing (DL) strategies, that is, they can distribute their products under different (proprietary, OS, e.g., open source) licensing terms. We investigate the relevance and impacts of such distribution strategies in the presence of an OS software competitor. We determine the conditions for this strategy to be profitable for the software firm, and its impact on price, market share, and welfare. We show that a DL strategy can be used to crowd the OS software out of the market. This strategy then is profitable for the software firm only if the spillovers coming from the hybrid software (i.e., second distribution launched by the software firm) are sufficiently high and result in both a higher price and a lower market share for the proprietary software. We also consider a situation where the introduction of DL leads to a market shared between the firm's software and the OS competitor. In this situation, the profitability of the DL strategy depends also on the degree of compatibility between the proprietary software and its OS competitor. We show also that this situation can generate conflicts of interests between proprietary software vendors and users, resulting in suboptimal outcomes.