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The impact of open source software on proprietary software firms' profit and social welfare

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Abstract

open source software has been achieved notable success in recent years and becomes a powerful rival to proprietary software in the software industry. Through modifying the Cournot model, this study analyzes how open source software affects the profit of proprietary software firms and social welfare. This paper supposes that proprietary software firms aim at maximizing profit and open source software can be freely available. It mainly finds that the emergence of open source software doesn't always decrease (resp. reduce) the proprietary software firm's profit or output (resp. price) and increase the social welfare. This conclusion contradicts the traditional recognition of people to open source software.

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Software firms are observed to support programmers' communities, which develop rival open source programs. A firm selling a copyright program has an incentive to support substitute copyleft programming when support creates compatibility between the programs and programs exhibit network effects. Costly compatibility benefits the firm as its consumers gain access to the community's services but may also hurt the firm because it cannot profit from the valuation difference between incompatible networks. The incentive arises under a weak network effect even when the consumers' benefit is small. Standardization and enlarging the open source programmers' community do not always increase welfare.
Article
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