R&D Competition between Commercial Open Source and Proprietary Software Firms

Abstract

Recent years, more and more firms develop commercial products based on open source software. The purpose of this study is to investigate R&D competition between commercial open source and proprietary software firms. This study constructs a mathematical model, and assumes that commercial open source software is inferior to its proprietary substitute in the usability and their functional qualities are the same before R&D. It finds that: (i) proprietary software firm has higher incentive to improve the functional quality than commercial open source firm; (ii) when the R&D efficiency is low enough, the appearance of commercial open source software leads to the investment reduction of proprietary software firm. While when the R&D efficiency is high enough, the opposite may occur; (iii) from the viewpoint of social welfare, commercial open source firm invests too little, while proprietary software firm may invest too much.