Investment Incentives in Open-Source and Proprietary Two-Sided Platforms

29 Pages Posted: 10 Jul 2012 Last revised: 7 Sep 2013

Ramon Casadesus-Masanell

Harvard University - Strategy Unit

Gastón Llanes

Pontificia Universidad Católica de Chile

Multiple version iconThere are 2 versions of this paper

Date Written: September 6, 2013

Abstract

We study incentives to invest in platform quality in open-source and proprietary two-sided platforms. Open platforms have open access, and developers invest to improve the platform. Proprietary platforms have closed access, and investment is done by the platform owner. We present five main results. First, open platforms may benefit from limited developer access. Second, an open platform may lead to higher investment than a proprietary platform. Third, opening one side of a proprietary platform may lower incentives to invest in platform quality. Fourth, the structure of access prices of the proprietary platform depends on (i) how changes in the number of developers affect the incentives to invest in the open platform, and (ii) how investment in the open platform affects the revenues of the proprietary platform. Finally, a proprietary platform may benefit from higher investment in the open platform. This result helps explain why the owner of a proprietary platform such as Microsoft has chosen to contribute to the development of Linux.

Keywords: Two-Sided Markets, Platform Investment, Network Effects, Open-Source Software, Application Development, Complementarity

JEL Classification: O31, L17, D43

Suggested Citation

Casadesus-Masanell, Ramon and Llanes, Gastón, Investment Incentives in Open-Source and Proprietary Two-Sided Platforms (September 6, 2013). Harvard Business School Strategy Unit Working Paper No. 12-114. Available at SSRN: https://ssrn.com/abstract=2102669 or http://dx.doi.org/10.2139/ssrn.2102669

Ramon Casadesus-Masanell (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-496-0176 (Phone)
617-496-5859 (Fax)

HOME PAGE: http://www.people.hbs.edu/rmasanell

Gaston Llanes

Pontificia Universidad Católica de Chile ( email )

Vicuna Mackenna 4860
Santiago
Chile

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