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Open Source and Competition Strategy Under Network Effects

Yu Wang (), Yu Chen () and Bonwoo Koo ()
Additional contact information
Yu Wang: School of Economics, Nanjing University
Yu Chen: University of Graz
Bonwoo Koo: University of Waterloo

No 2017-03, Graz Economics Papers from University of Graz, Department of Economics

Abstract: This study analyzes a firm’s decision to adopt an open source strategy in the development of a primary system product that has an indirect network effect on complementary accessory products, and evaluates its impact on market competition and social welfare. It shows that firms are likely to switch from a proprietary development strategy to an open source strategy as the network effect decreases, and a firm’s strategy also depends on consumers’ attitude toward future utility. This result implies that the presence of open source systems can benefit proprietary firms due to consumers’ higher willingness-to-pay for accessory products, and can lead to greater industry profit and social welfare. This study also shows that when the system development cost is non-negligible, firms prefer an open source strategy due to the cost-saving effect, but society is worse off due to a fragmented market with multiple system products.

Keywords: Hotelling model; packaged goods; network effect; forward-looking consumers (search for similar items in EconPapers)
JEL-codes: L14 L15 L17 L86 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ict, nep-ind, nep-ipr, nep-mkt and nep-tid
Date: 2017-05
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