Abstract
Firms have the choice of developing software as either open source or closed source. The open-source approach to software development has been advocated as a new and better method for developing high quality software than the traditional closed-source approach. In open source, volunteer programmers freely contribute code to develop and improve the software. This paper describes the key nonpecuniary motivations for these programmers. They are less motivated to contribute if they observe commercial marketing of the open-source software they helped create, leading to a reduction in improvements to the software. A primary concern for software firms seeking to develop and market open-source software is, thus, how the motivation of contributors should be managed. We examine optimal pricing strategies for open-source and closed-source software keeping in mind the distinct motivations of programmers in the two cases. We compare profits and software qualities from the two approaches and provide implications for firms in the software industry.
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