Technology, property rights and organizational diversity in the software industry

Why do open- and closed-source productions co-exist? To address this question, the paper studies the viability of distinct systems for software development. The model shows that: (a) for low design costs of modularity, both open- and closed-source productions are viable systems; (b) closed-source production is more likely to be adopted the greater the expected rents on software; and (c) production efficiency is not a necessary condition for the stochastic stability of a system to obtain. These three results can shed light on the emergence of organizational diversity in the software industry. The paper adds to the literature in three ways: first, it considers property rights and technology as endogenous variables in the process of system design; second it argues that in producing software multiple equilibrium designs may exist; and third, it shows that, in because of high rents and low design costs of modularity, production inefficiency can be persistent.

► We study the viability of distinct systems for software development.
► For low design costs of modularity, multiple equilibrium designs exist.
► High expected rents make closed-source production the stochastically stable system.
► For a large range of the parameter space production inefficiency can be persistent.
► These results are used to explain the emergence of organizational diversity in the software industry.