We model the competition between a proprietary firm and an open source
rival, by incorporating the nature of the GPL, investment opportunities by the
proprietary firm, user-developers who can invest in the open source
development, and a ladder type technology. We use a two-period dynamic mixed
duopoly model, in which a profit-maximizing proprietary firm competes with a
rival, the open source firm, which prices the product at zero, with the quality
levels determining their relative positions over time. We analyze how the
existence of open source firm affects the investment and the pricing behavior
of the proprietary firm. We also study the welfare implications of the
existence of the open source rival. We find that, under some conditions, the
existence of an open source rival may decrease the total welfare.
Jaisingh, J., See-To, E.W.K. and Tam, K.Y. (2008) The Impact of Open Source Software on the Strategic Choices of Firms Developing Proprietary Software. Journal of Management Information Systems, 25, 241-276.