Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry

Nicholas Economides () and Evan Katsamakas

No 05-06, Working Papers from NET Institute

Abstract: Technology platforms, such as Microsoft Windows, are the hubs of technology industries. We develop a framework to characterize the optimal two-sided pricing strategy of a platform firm, that is, the pricing strategy towards the direct users of the platform as well as towards firms offering applications that are complementary to the platform. We compare industry structures based on a proprietary platform (such as Windows) with those based on an open-source platform (such as Linux) and analyze the structure of competition and industry implications in terms of pricing, sales, profitability, and social welfare. We find that, when the platform is proprietary, the equilibrium prices for the platform, the applications, and the platform access fee for applications may be below marginal cost, and we characterize demand conditions that lead to this. The proprietary applications sector of an industry based on an open source platform may be more profitable than the total profits of a proprietary platform industry. When users have a strong preference for application variety, the total profits of the proprietary industry are larger than the total profits of an industry based on an open source platform. The variety of applications is larger when the platform is open source. When a system based on an open source platform with an independent proprietary application competes with a proprietary system, the proprietary system is likely to dominate the open source platform industry both in terms of market share and profitability. This may explain the dominance of Microsoft in the market for PC operating systems.

Keywords: networks; network effects; network externalities; complements; systems; open source software; technology platforms; software industry structure (search for similar items in EconPapers)
JEL-codes: C63 D42 D43 L12 L13 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2005-10
New Economics Papers: this item is included in nep-com, nep-ict, nep-ino, nep-mic, nep-net and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Related works:
Journal Article: Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry (2006)
Working Paper: Two-sided competition of proprietary vs. open source technology platforms, and the implications for the software industry (2005)
Working Paper: Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry (2004)
Working Paper: Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry (2004)
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