Open Source Software Subsidies and Network Compatibility in a Mixed Duopoly

For many applications, open source software (OSS) can offer a high-quality alternative to proprietary software (e.g. Linux, Apache, Android,...). But even if OSS is usually free of charge, its installation and use require some skills. Should the government intervene to promote the diffusion of OSS and provide some learning or financial support to potential adopters? This paper examines whether public subsidies towards open source software is socially desirable and how the extent of compatibility between open source software and proprietary software can influence the amount of subsidies. We consider a mixed duopoly model in which a proprietary software (PS) company competes with an open source software (OSS) community. Users are heterogeneous in their ability to use OSS, and their utility depends on the number of users who have adopted the same software or a compatible software (existence of network externalities). Four situations are distinguished: full compatibility between OSS and PS, full incompatibility, and one-way compatibility (either only OSS or PS is compatible). We show that if the government only takes care of consumer surplus, public subsidies are welfare-enhancing. But the optimal level of subsidies is larger with full compatibility and PS compatibility than full incompatibility and OSS compatibility. These results suggest that government policy towards OSS must be conditional to the degree of compatibility between PS and OSS.