Competitive implications of software open-sourcing

We analyze the economic trade-offs associated with open-sourcing, the business strategy of releasing free open-source versions of commercial software products. We argue that the effect of the release of open-source versions on the customers' perception of products is an important determinant of open-sourcing outcomes. Open-sourcing is modeled as a strategic option for duopolists that compete in a market for software products. We show that open-sourcing can arise as an equilibrium outcome in our simple two-stage game. If the enhancement of customer values from open-sourcing is moderate or high, firms may find it optimal to release open-source versions of their products.

► We analyze economic tradeoffs of open-sourcing software products.
► The firms' decision to open source is modeled as a two stage game.
► Customers' perception of the products' value determines the outcomes of the game.
► Open-sourcing is an equilibrium outcome in a software market.