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

Management Science, Forthcoming

83 Pages Posted: 7 May 2020

See all articles by Terrence August

Terrence August

University of California, San Diego (UCSD) - Rady School of Management

Wei Chen

University of Arizona - Eller College of Management

Kevin Zhu

University of California, San Diego

Date Written: March 16, 2020

Abstract

In enterprise software markets, firms are increasingly using services-based business models built on open-source software (OSS) to compete with established, proprietary software firms. Because thirdparty firms can also strategically contribute to OSS and compete in the services market, the nature of competition between OSS constituents and proprietary software firms can be complex. Moreover, their incentives are likely influenced by the licensing schemes that govern OSS. We study a three player game and examine how open-source licensing affects competition among an open-source originator, open-source contributor, and a proprietor competing in an enterprise software market. In this regard, we examine: (i) how quality investments and prices are endogenously determined in equilibrium, (ii) how license restrictiveness impacts equilibrium investments and the quality of offerings, 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 in markets characterized by software providers with similar development capabilities yet cast in favor of the proprietor. On the other hand, when either these capabilities become more dispersed or remain similar but tilt in favor of open-source, a more restrictive license instead encourages greater effort from the OSS contributor, leads to higher OSS quality, and provides a larger societal benefit.

Keywords: Open-source software, software competition, licensing, collaborative development, co-creation, product quality, software services market, strategic contributions to open-source software

JEL Classification: L13, L17, L86, O34, C72, D43, D45

Suggested Citation

August, Terrence and Chen, Wei and Zhu, Kevin, Competition Among Proprietary and Open-Source Software Firms: The Role of Licensing on Strategic Contribution (March 16, 2020). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3575058

Terrence August

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://management.ucsd.edu/faculty/directory/august/

Wei Chen (Contact Author)

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Kevin Zhu

University of California, San Diego ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

HOME PAGE: http://https://rady.ucsd.edu/people/faculty/zhu/

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