Abstract
The rapid emergence of open source software has generated significant debate over its effect on software innovation. The goal of this paper is to explore the impact of open source software innovation on a mixed market also containing proprietary software, and to compare this market with a pure market in which only proprietary software firms exist. Building upon Hotelling's model of horizontal differentiation, open source innovation is characterized as the result of contributions from utility maximizing consumer-programmers. While I find that a mixed market can have more innovation than a pure market, increased open source innovation may decrease overall innovative activity and lead to lower welfare within a mixed market. These results are driven by the finding that innovation in open source software crowds out proprietary software innovation. The innovation and welfare effects of government policies such as subsidies or compulsory usage schemes are also considered.
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