Competitive Strategy for Open Source Software

Abstract

Commercial open source software (COSS) products --- privately developed software based on publicly available source code --- represent a rapidly growing, multi-billion-dollar market. A unique aspect of competition in the COSS market is that many open source licenses require firms to make certain enhancements public, creating an incentive for firms to free-ride on the contributions of others. This practice raises a number of puzzling issues. First, why should a firm further develop a product if competitors can freely appropriate these contributions? Second, how does a market based on free-riding produce high-quality products? Third, from a public policy perspective, does the mandatory sharing of enhancements raise or lower consumer surplus and industry profits?

We develop a two-sided model of competition between COSS firms to address these issues. Our model consists of (1) two firms competing in a vertically differentiated market, in which product quality is a mix of public and private components and (2) a market for developers that firms hire after observing signals of their contributions to open source. We demonstrate that free-riding behavior is supported in equilibrium, that a mandatory sharing setting can result in high quality products, and that free-riding can actually increase profits and consumer surplus.

Keywords: Open Source Software, Product Strategy, Signaling, Game Theory

JEL Classification: D02, D43, D82