On the Dynamics of Competition between Commercial and Free Software

This article introduces dynamic network externalities into a Hotelling-like model of competition between commercial and free software. The assumption of linear network effects enables a full-fledged dynamic analysis taking boundary solutions into account. The extent of network effects related to the separation rate and consumers’ learning costs determines whether both types of software can coexist in the long run and whether a lock-in region emerges. Governmental promotion of free software increases welfare if network externalities are sufficiently large.