Competition with Open Source as a Public Good

Ernan Haruvy, University of Texas at Dallas - Department of Marketing, Ashutosh Sethi, University of Texas at Dallas - School of Management, and Suresh Sethi, University of Texas at Dallas - School of Management

2/25/2008
(Original Publish Date: 1/22/2008)

The open source paradigm is often defined as a collaborative effort, implying that firms and consumers come together in a non-competitive climate. We show here that open source development can arise from a competitive climate. Under competition, we find that open source is the surplus maximizing outcome and can be in equilibrium if cost asymmetries are small. However, when cost asymmetries are large, contradictions between equilibrium and welfare maximization result. Considerations typical to public good problems arise, with issues of asymmetric contributions and freeriding. These issues should guide the firm's as well as the society's decisions to implement open source in particular environments. We analyze this problem in the framework of a dynamic duopolistic competition, with firms controlling their investments in software.