Open Source vs. Proprietary Software: Competition and Compatibility

37 Pages Posted: 31 Aug 2005

See all articles by Sang-Yong Tom Lee

Sang-Yong Tom Lee

Hanyang University - School of Business

Zhaoli Meng

National University of Singapore (NUS)

Date Written: August 2005

Abstract

We use a Hotelling linear city model to study competition between open source and proprietary software, where only the producer of the proprietary software aims at maximizing the profit. The producer of the proprietary software must decide on compatibility. Different compatibility strategies will lead to different network externality, and thus result in different profit for the producer of the proprietary software. We found that the proprietary producer's choice of compatibility strategy depends on the market coverage conditions. When the market is fully covered, one-way compatibility is the best strategy for the proprietary software. When the market is partly covered, two-way compatibility is the best strategy. Such results are not affected by software quality. Furthermore, when the provider of the open source software pursues the maximum market share rather than reacts passively, two-way compatibility would be the best choice for both the open source and the proprietary software. Moreover, the proprietary software producer does not favor its proprietary rival changing to open source software. Such a change may lower the social welfare.

Keywords: Open Source Software, Proprietary Software, Compatibility, Competition

JEL Classification: L1, L13, L86

Suggested Citation

Lee, Sang-Yong Tom and Meng, Zhaoli, Open Source vs. Proprietary Software: Competition and Compatibility (August 2005). Available at SSRN: https://ssrn.com/abstract=780804 or http://dx.doi.org/10.2139/ssrn.780804

Sang-Yong Tom Lee (Contact Author)

Hanyang University - School of Business ( email )

17 Haegdang-dong
Seongdong-ku
Seoul, 133-791
Korea

Zhaoli Meng

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

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