Open Source Software, Competition and Innovation

The entry and success of open source software (OSS), for example, Linux's entry into the operating systems market, has fundamentally changed industry structures in the software business. In this paper we explore the process of OSS innovation and highlight the impact of increased competition and different cost structures on innovative activity in the industry, which has been neglected in the literature thus far. In a simple model, we formalize the innovation impact of OSS entry by examining a change in market structure from monopoly to duopoly under the assumption that software producers compete in technology rather than price or quantities. The model takes into account development costs and total cost of ownership, whereby the latter captures items such as network externalities. The paper identifies a pro-innovative effect of both intra-OSS and extra-OSS competition.