The Quantity Competition between Open Source and Proprietary Software

By modifying Hotelling model, we research the differentiation decisions between open source software (OSS) and proprietary software (PS) and the location decisions of proprietary software when open source software and proprietary software coexist in a software market. In this paper, we assume proprietary software producer pursues profit maximization and open source software is freely available. The study finds that: (i) Higher (resp. lower) the OSS's learning cost, smaller (resp. greeter) the software differentiation between OSS and PS; (ii) the compatibility degree between open source and proprietary software affects software differentiation; (iii) how the network externality and OSS user's software development skills affect the software differentiation decisions and the location decisions of proprietary software depends on the compatibility degree between PS and OSS.

This paper investigates competition between open source and proprietary software. Open source software is divided into two types: free open source and commercial open source. Free open source software can be available from the not-for-profit community, and Commercial open source software is software product based on free open source software. The usability of both free and commercial open source software is assumed to be inferior to proprietary software. It finds that: (i) when commercial open source vendor faces competition from proprietary software and free open source software, it may still be able to obtain profits; (ii) commercial open source vendor's pricing (resp. share or profit) may still be much lower (resp. less) than that of proprietary vendor even if its software functionality is not inferior to proprietary software; (iii) commercial open source vendor's pricing and profit may not increase as its software usability increases; (iv) proprietary software's price decreases with the usability of commercial open source software. Index Terms—proprietary software, open source software, price competition, software features, software usability

By extending Hotelling game model, this paper explores compatible strategies between open source software (OSS) and proprietary software (PS). In this paper, we assume that PS producer aims at profit maximization, OSS producer pursues market share maximization and software user's expectations on network size may be fulfilled or myopic. For each type of user expectation, we study both cases of market fully covered and partly covered. The main findings are following: (i) in the case of myopic expectation, both OSS and PS producers choose maximum compatible degree in equilibrium. This conclusion is true in both fully covered and partly covered markets; (ii) in the case of fulfilled expectation, equilibrium compatible strategies depend on market coverage. When the market is partly covered, both OSS and PS producers choose maximum compatible degree in equilibrium. But when the market is fully covered, PS producer may choose maximum compatible degree or incompatibility as its equilibrium strategy (The choice depends on the learning (maintenance or development) cost of OSS, user's software development capacity and network externality); (iii) how the competitive strategies of OSS and PS producers are affected by the rival's compatible degree may be different in different user expectations (or market coverage).

With the popularity of open source software (OSS) as an alternative to proprietary software (PS), proprietary-software firms such as IBM and Microsoft started to embrace this new paradigm during the past decades. We analyze how firms choose the software development strategy between OSS and PS, by constructing a duopoly model in which consumers sequentially purchase software and complementary services in a market that exhibits an indirect network effect. We show that a PS firm may benefit from the presence of an OSS firm, and the software market can be dominated by a single OSS if the indirect network effect is weak and the cost saving effect of OSS is negligible. We also show that the market can support two OSS if the cost saving effect of OSS is sizeable, and two PS if firms can provide fully compatible services to competitor’s PS. Building upon the existing works that investigate the competition between PS and OSS, this study improves our understanding of the role of OSS in firm’s software development strategy and market equilibrium.

Purpose: A growing number of open source software emerges in many segments of the software market. In addition, software products usually exhibit network externalities. The purpose of this paper is to study the impact of open source software on the quality choices of proprietary software vendors when the market presents positive network externalities. Design/methodology: To analyze how open source software affects the optimal quality of proprietary software, this paper constructs two vertical differentiation models: the basic model considers proprietary software monopolizing the market, and its extended one considers proprietary software competing with open source substitute. Findings: This paper mainly finds that the presence of open source software does not necessarily lead to the quality of proprietary software decreases (or increases). The network externalities and compatibility between open source and proprietary software may change the impact of open source software on the quality of proprietary software and may affect the quality choices of proprietary software vendors. Originality/value: The main contribution of this paper is to examine the effect of open source software on the quality choices for proprietary software vendors in software markets exhibiting positive network externalities.

The social welfare differs from a software market when monopolized by open source software (OSS) and proprietary software (PS) were investigated by modifying Cournot model. Assuming the market exhibits network externality and software user expectations are fulfilled or myopic, the results show that the social welfare of the market monopolized by OSS may be lower than that of this market monopolized by PS. Therefore the social planner should not unconditionally encourage open source software when developing the software industry policy. Moreover, the probability of “the social welfare of the market monopolized by OSS is lower (or higher) than that of this market monopolized by PS” may be affected by user's software development skill, OSS's learning (maintenance or development) cost and network externality.

This study investigates how open source software can play influences on the quality choices of commercial open source and proprietary software providers. It considers two types of open source software: community open source and commercial open source, and assumes that the usability of commercial open source software is better than community open source substitute but inferior to proprietary substitute. It finds that: (i) the functional quality of proprietary software decreases as the functional quality of community open source software increases, but it may increase as the usability of community open source software increases; (ii) even if commercial open source producers must open the source codes of their quality contributions, they have incentive to enhance the functional quality of community open source software; (iii) the influence of community open source software’s quality (usability or functional quality) or commercial open source software’s usability on the functional quality of commercial open source and proprietary software may be not same; (iv) the appearance of commercial open source software may lead to proprietary software producers lowering their software functional quality.

Impact of user skills and network effects on the competition between open source and proprietary software

Open Source vs. Proprietary Software: Competition and Compatibility

This paper analyzes the impact of network externalities on the competition between open source software (OSS) and proprietary software (PS) in a fully covered market. The installed base and the profit of proprietary software are found increasing at the expense of decreasing user base for OSS. Furthermore, we find that a threshold corresponding to the quality ratio between OSS and proprietary software can be derived such that if the network effect intensity of the OSS is greater than that of the proprietary software multiplied by this threshold value, then OSS benefits from the presence of network externality; Finally, we find that making software products compatible with competing rival is not desirable by proprietary software vendors but favored by OSS venders.

There are two puzzles in the software competition literature: whether both proprietary and open source software will survive and how producers of proprietary software differentiate themselves from open source competition. I address both puzzles by analyzing competition between a firm producing proprietary software and a community producing open source software. If the firm faces no competition, then the software caters to less technologically savvy individuals. When facing competition, the open source software caters to the most technologically savvy individuals, leading the firm to target even less savvy individuals than it would when acting as a monopolist in order to differentiate its software from the open source option. The open source movement, then, may not be an unalloyed success as the growth in open source can be tied to deterioration in the proprietary software. Given that both types of software survive by catering to different segments of the market, an important avenue for research will be to analyze the stability of the underlying segments and the corresponding welfare implications.

Impact of User Skills and Network Effects on the Competition between Open Source and Proprietary Software

In this paper, we build analytical models to examine the impact of network externalities on the competition between open source software (OSS) and proprietary software. We investigate the competing OSS and proprietary software products with comparable functionalities in four different scenarios depending on whether they are compatible with each other and whether the underlying market is fully covered (i.e., all consumers adopt one of the two products). Furthermore, we study which party has the most incentive to make its product compatible with its counterpart. When the market is fully covered, the installed base and the profit of proprietary software increase at the expense of a decreasing user base for OSS in the presence of network externalities. This competitive imbalance becomes more pronounced when OSS and proprietary software are incompatible and the market is partially covered. Finally, we find that in the presence of network externalities, being compatible with its rival is not desirable for the proprietary software, but highly beneficial to the OSS community.

This chapter evaluates the hypothesis that open source software can potentially help promote technological innovation. It analyzes the potential to open source software solve the tension between the need to provide firms and individuals with the incentive to innovate and the desirability of encouraging widespread use of cutting-edge technologies and examines the development and marketing of software. The analysis indicates that most firms extensively blend the development of open source and proprietary software, rather than specializing in one or the other and that they diversify between open source and proprietary software in other dimensions as well.

Methodology for Public Administrators for selecting between open source and proprietary software