Research Note ---Lock-In Strategy in Software Competition: Open-Source Software vs. Proprietary Software

Kevin Xiaoguo Zhu () and Zach Zhizhong Zhou ()
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Kevin Xiaoguo Zhu: The Rady School of Management, University of California, San Diego, La Jolla, California 92093
Zach Zhizhong Zhou: The Rady School of Management, University of California, San Diego, La Jolla, California 92093

Information Systems Research, 2012, vol. 23, issue 2, 536-545

Abstract: Open-source software poses a serious challenge to proprietary software vendors. “Lock in customers” seems a tempting strategy for proprietary software vendors, who attempt to lock in customers by creating switching costs. This paper examines whether such a lock-in strategy will indeed benefit proprietary software vendors facing competition from open-source software, who can credibly commit future prices. Developing a two-period duopoly model in which software products are differentiated and customers are heterogeneous, we find that the lock-in strategy is actually counterproductive in competing against open-source software. In fact, giving customers the freedom of choice may end up benefiting the proprietary software vendor. In terms of the broader effect, we find that lock-in reduces overall social welfare, but certain customers may actually be better off with it. Finally, we show that the lock-in strategy works differently for different types of customers in the software market (i.e., foresighted versus myopic customers). This suggests that customer behavior could significantly alter the equilibrium strategy of software vendors.

Keywords: software; competition; lock-in; open-source software; proprietary software; game theory; switching cost (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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