Impact of Competition from Open Source Software on Proprietary Software

The number and impact of open source projects is increasing. We examine the impact of competition from open source software (OSS) on proprietary software providers by analyzing three cases: (i) proprietary software as a monopoly, (ii) mixed duopoly competition between proprietary software provider and OSS, and (i) duopoly competition between two proprietary software providers. We use an analytical model to capture two important features of OSS: (i) its zero licensing price and (ii) its lower usability in comparison with proprietary software. Prior studies have shown that competition from OSS causes the proprietary software provider to produce software that is both lower quality and lower priced than software offered by a monopolist. In contrast, our paper shows that these results hold under certain conditions but are not always true. We find that competition from OSS can induce the proprietary software provider to increase its software quality and price relative to those of the monopolist when the proprietary software provider's cost of enhancing software quality is moderate. Surprisingly, we also find that competition from OSS can lead to a reduction in social welfare. Whereas prior research has shown this result in the context of network effects, we show that this can occur in the absence of network effects and offer a novel explanation.