Competitive Strategy for Open Source Software

C open source software (COSS) products—privately developed software based on publicly available source code—represent a rapidly growing, multibillion-dollar market. A unique aspect of competition in the COSS market is that many open source licenses require firms to make certain enhancements public, creating an incentive for firms to free ride on the contributions of others. This practice raises a number of puzzling issues. First, why should a firm further develop a product if competitors can freely appropriate these contributions? Second, how does a market based on free riding produce high-quality products? Third, from a public policy perspective, does the mandatory sharing of enhancements raise or lower consumer surplus and industry profits? We develop a two-sided model of competition between COSS firms to address these issues. Our model consists of (1) two firms competing in a vertically differentiated market, in which product quality is a mix of public and private components, and (2) a market for developers that firms hire after observing signals of their contributions to open source. We demonstrate that free-riding behavior is supported in equilibrium, that a mandatory sharing setting can result in high-quality products, and that free riding can actually increase profits and consumer surplus.