Open Source Development with a Commercial Complementary Product or Service

Production and Operations Management, Vol. 17, No. 1, pp. 29-43, January-February 2008

15 Pages Posted: 6 Feb 2008 Last revised: 2 Sep 2014

See all articles by Ernan Haruvy

Ernan Haruvy

University of Texas at Dallas - Naveen Jindal School of Management

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Jing Zhou

University of North Carolina (UNC) at Charlotte

Abstract

We examine optimal control decisions regarding pricing, network size and hiring strategy in the context of open source software development. Opening the source code to a software product often implies that consumers would not pay for the software product itself. However, revenues may be generated from complementary products. A software firm may be willing to open the source code to its software if it stands to build a network for its complementary products. The rapid network growth is doubly crucial in open source development, where the users of the firm's products are also contributors of code that translates to future quality improvements. To determine whether or not to open the source, a software firm must jointly optimize prices for its various products while simultaneously managing its product quality, network size, and employment strategy. Whether or not potential gains in product quality, network size, and labor savings are sufficient to justify opening the source code depends on product and demand characteristics of both the software and the complementary product as well as on the cost and productivity of in-house developers relative to open source contributors. This paper investigates these crucial elements to allow firms to reach the optimal decision in choosing between the open and closed source models.

Keywords: Pricing, Optimal control, Open Source, Network Externalities, complementary product or service

JEL Classification: C61, D4, D62, M30, D42

Suggested Citation

Haruvy, Ernan and Sethi, Suresh and Zhou, Jing, Open Source Development with a Commercial Complementary Product or Service. Production and Operations Management, Vol. 17, No. 1, pp. 29-43, January-February 2008. Available at SSRN: https://ssrn.com/abstract=1089843

Ernan Haruvy

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

Jing Zhou

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

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