How Can Proprietary Software Firms Take Advantage Over Open Source Communities? Another Story of Pro…fitable Piracy

This paper analyzes the impact on a proprietary software (PS) firm's profit of the activities of an open source software (OSS) community and a piracy channel, as well as on welfare. We develop a model in which the PS firm competes by price with both producers and also selects its compatibility strategy towards the OSS solution and its protection strategy towards the software copy (PPS). We show that the existence of the piracy channel incumbent enables the PS firm to reach out higher profit than when piracy is prevented. A key mechanism at stake is that the PS monopolist can define its compatibility strategy so as to level price competition down while extending its market share at the same time. Although it has to provide some protection efforts towards the piracy channel to do so, the extra revenues it generates always overcome such latter costs. From a regulatory point of view, our results stress that welfare is higher when piracy is prevented while the PS firmsets compatibility towards the OSS solution.