Competition Among Proprietery and Open Source Software Firms

Competition among Proprietary and Open Source Software Firms: The Role of Licensing on Strategic Contribution

Open-source software (OSS) firms are increasingly using service-based business models to compete with established proprietary software firms. Because other members of the open source community can strategically contribute to OSS and compete in the services market, the nature of competition between OSS and proprietary software firms is becoming more complex. Further, their incentives are strongly influenced by the licensing schemes that govern OSS. We study a 3-way game with strategic contribution from the community and focus on how open-source licensing affects competition among an open-source originator, open-source contributor, and a proprietor competing in the same software market. In this regard, we examine: (i) how quality investments and service prices are endogenously determined in equilibrium, (ii) how license restrictiveness impacts equilibrium investments and the quality of services brought to market, and (iii) how license restrictiveness affects consumer surplus and social welfare. Although some in the open-source community often advocate restrictive licenses such as GPL, because it is not always in the best interest of the originator for the contributor to invest greater development effort, such licensing can actually be detrimental to both consumer surplus and social welfare when it exacerbates this incentive conflict. We find such an outcome to be the case in markets characterized by software providers with similar development capabilities. In contrast, when their capabilities are more dispersed, a more restrictive license can instead encourage greater effort from the OSS contributor, lead to higher OSS quality, and provide a larger societal benefit.

Session 4A: Competitive Markets, Paper No.1