Competition Among Proprietary and Open-Source Software Firms: The Role of Licensing on Strategic Contribution

In enterprise software markets, firms are increasingly using services-based business models built on open-source software (OSS) to compete with established, proprietary software firms. Because thirdparty firms can also strategically contribute to OSS and compete in the services market, the nature of competition between OSS constituents and proprietary software firms can be complex. Moreover, their incentives are likely influenced by the licensing schemes that govern OSS. We study a three player game and examine how open-source licensing affects competition among an open-source originator, open-source contributor, and a proprietor competing in an enterprise software market. In this regard, we examine: (i) how quality investments and prices are endogenously determined in equilibrium, (ii) how license restrictiveness impacts equilibrium investments and the quality of offerings, and (iii) how license restrictiveness affects consumer surplus and social welfare. Although some in the open-source community often advocate restrictive licenses such as GPL, because it is not always in the best interest of the originator for the contributor to invest greater development effort, such licensing can actually be detrimental to both consumer surplus and social welfare when it exacerbates this incentive conflict. We find such an outcome in markets characterized by software providers with similar development capabilities yet cast in favor of the proprietor. On the other hand, when either these capabilities become more dispersed or remain similar but tilt in favor of open-source, a more restrictive license instead encourages greater effort from the OSS contributor, leads to higher OSS quality, and provides a larger societal benefit.