On substitution of intellectual property and free disclosure: an analysis of R&D strategies in software technologies

Major firms have joined the open-source movement and have chosen to apply that development methodology in their projects. Our model examines the links between openness and innovation in software technologies by revealing how disclosure affects the technical quality of computer applications and the profits of myopic and far-sighted firms. The model analyzes the degree of disclosure that should be implemented to optimize profits in various market scenarios. Further, we reveal how social welfare of users (in terms of technical quality of the products that they implement) relates to profit-maximization decisions of the firm. If revenue is unresponsive to openness or slowly responds to it, the firm would prefer to leave the source code proprietary. Otherwise, if the market conditions change and the effective revenue increases rapidly enough with openness, the optimal strategy changes from entirely proprietary to some open-source development.