The effect of competition from open source software on the quality of proprietary software in the presence of network externalities

Abstract

Purpose: A growing number of open source software emerges in many segments of the software market. In addition, software products usually exhibit network externalities. The purpose of this paper is to study the impact of open source software on the quality choices of proprietary software vendors when the market presents positive network externalities.

Design/methodology: To analyze how open source software affects the optimal quality of proprietary software, this paper constructs two vertical differentiation models: the basic model considers proprietary software monopolizing the market, and its extended one considers proprietary software competing with open source substitute.

Findings: This paper mainly finds that the presence of open source software does not necessarily lead to the quality of proprietary software decreases (or increases). The network externalities and compatibility between open source and proprietary software may change the impact of open source software on the quality of proprietary software and may affect the quality choices of proprietary software vendors.

Originality/value: The main contribution of this paper is to examine the effect of open source software on the quality choices for proprietary software vendors in software markets exhibiting positive network externalities.