Proprietary or open source software? Winner-takes-all competition, partial adoption and efficiency

We study the conditions ruling the diffusion of open source as opposed to proprietary software distributed by a commercial editor. The two types of software differ in relation to their adoption costs and to the range of functionalities they offer. By distinguishing software users according to their ability to contribute to the production of open source solutions, we characterize the Nash equilibrium in a sequential game in which users choose to adopt open source software or proprietary software or not to adopt. We find that adoption patterns depend on the conditions related to the users? expectations and we highlight potential cases of both winner-takes-all and shared-market outcomes. Since multiple equilibria are only imperfectly controlled by the commercial editor, we show that the latter?s strategy can be understood as a balance between a low price high quality strategy and a high price low quality strategy. Welfare analysis provides mixed results. The existence of a credible open source threat improves the utility of end-users even if the proprietary solution is eventually adopted. The diffusion of open source software can generate conflicts of interest. In some cases, these conflicts oppose the interests of users to those of the commercial firm. Yet, in other cases, the interests of some users can be aligned to those of the commercial editor.