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Open source and competition

June 2010

Economic Focus

The software market has benefitted for a long time from intellectual property protection. By forbidding free copying and distribution of the proprietary software, the intellectual property protection assured that a proprietary software producer received sufficient revenues to recover its investments in innovation. It therefore seemed necessary to stimulate the software innovation in the first place. Nevertheless, several developers decided to distribute open-source software for free and started using special types of licenses permitting free copying of their products.  

The simultaneous presence of the open-source software distributed for free and the proprietary software generating revenues on its sale raises two basic questions. Which type of software will survive? Will software producers continue to invest in innovation at the same pace? These two simple questions may not have easy answers.

The present paper provides an overview of three different opinions presented by Gaudel (2008), Economides & Katsamakas (2005) and Lambardi (2009). Gaudel (2008) argues that the proprietary software and the open-source software may coexist, as the more general open-source software may be needed to fill in the niches between highly specialized and expensive proprietary software. In other words, the open-source software may serve more general purposes, while the proprietary software may specialize in very narrow areas. Economides and Katsamakas (2005) demonstrate that the proprietary operating system may dominate the market, because the applications developed for the proprietary operating systems may not have good alternatives working on the open-source operating system and because consumers may not be willing to bear the cost of switching from the proprietary operating system to the open-source operating system. Finally, Lambardi (2009) indicates that the potential threat of the open-source software may have an adverse effect on proprietary software research and development projects. The possibility of revealing the source code may as a result hinder innovation in the software market.    

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