The Penguin and the Cartel: Rethinking Antitrust and Innovation Policy for the Age of Commercial Open Source

Abstract

We discuss welfare and various policy interventions for mixed ICT markets where firms use either 'open source' (OS) or 'closed source' (CS) business models. We find that the existence of OS business models improves social welfare compared to all-CS industries by letting firms share costs and avoid duplication. However, code sharing also establishes a de facto quality-cartel that suppresses OS firms' incentives to invest. Competition from CS firms weakens this cartel and improves welfare. That said, market forces alone provide too little CS competition. We find no support for various government interventions based on tax breaks for OS-based firms and pro-OS procurement preferences by government. However, policies that directly target the supply of OS code have a positive impact.

Keywords: open source, commercial open source, non-cooperative R&D

JEL Classification: K21, L17, O38