Competition and Compatibility with Open Source Software

We use Hotelling’s linear city model to study asymmetric competition between open source and proprietary software, where only one party the proprietary software producer aims at maximizing the profit. We focus on the different compatibility choices of the proprietary software, which lead to different network externality, and thus result in different profit for proprietary software producers. It is found that the best compatibility strategy depends on the market coverage conditions: when the market is fully covered, one-way compatibility is the best choice for the proprietary software. On the other hand, when the market is not fully covered, two-way compatibility becomes the best strategy. These results are not affected by the software quality. Furthermore, once the open source software begins to purse the maximum market share, being two-way compatibility is the best strategy for both open source and proprietary software. We also investigate the impact of the open source software. It is shown that the proprietary software producer does not favor its proprietary rival changes to open source software. Moreover, such change may not benefit the social welfare.