A Model of corporate donations to open source under hardware–software complementarity

In recent years there has been an increasing diffusion of open source projects, as well as an increasing interest among scholars on the topic. Open source software (OSS) is developed by communities of programmers and users, usually sponsored by private firms; OSS is available in the public domain and redistributed for free. In this paper a model of open and closed source software (CSS) competition will be presented. Hardware and software are complement goods and OSS is financed by hardware firms. There is a differentiated oligopoly of hardware–software bundles, in which firms compete in prices. Results are several; positive (hardware firm) contributions are possible, although, they are not socially optimal. OSS availability has a positive impact on social welfare, and on hardware firms’ profits and prices. CSS firm’s price and profits decrease when OSS is available. The effect on the price of the hardware–CSS bundle depends on demand own–price elasticity. The model can explain the increasing participation in open source projects of embedded device producers. Hardware firms’ incentives to contribute to OSS development process are greater when there is a relatively intensive competition among producers. Hardware firms use OSS to decrease the software monopolist’s market power.