24th Congress of the European Economic Association

Barcelona, August 23-27, 2009

Public and private

provision of public
and private goods*
* Paper Title: Consumer Welfare Alexia Gaudeul
and Market Structure in a Model of
Competition between Open Source GSBC, Jena
and Proprietary Software
Introduction

 A number of industries see public provision of

public goods along with private provision of
private goods:
 Health care (Sloan 2000), Education (Epple and
Romano 1998), Art (Frey 1999).
 Differences in incentives and objectives (Brhlikova
2004 and 2006, Sloan 2000), disciplining effect
(Glaeser 2002), crowding out (Frey 1999).
Introduction

 In the software industry, however, cohabitation

between private provision of public goods and
private provision of private goods.
 software developed under proprietary license terms
and
 software developed under open source (OS) license
terms.
Introduction

 Strand of literature on private provision of public

good (Bergstrom et al. 1986).
 One public good, many private goods.
 Application to Open Source:
 Schmidtke (2006): OS software (OSS) as complement
to proprietary software is worth investing into.
 Polborn (2008): Developing OSS is like joining a club,
competition between clubs may lead to over-provision
of OSS.
Contribution
 Model inspired by “The number and size of nations”,
Alesina and Spolaore 1997.
 Advantage:
 Many OS projects and proprietary firms all using the same
technology.
 Competition in attracting users/developers.
 Drawback: Free riding is not modeled.
 Consider entry by proprietary software in OS industry and
conversely.
 Consider equilibrium of a mixed industry.
Motivation
 Historical notes: OS was the original system of software
development (50s to 70s), with proprietary software
coming later (70s, 80s).
 GNU (1983) was a reaction, led by Stallmann, to a trend
towards proprietarization of software (cf. Unix and AT&T).
 Share of OS: survey of a number of development areas to
determine the prevalence of the use of OSS vs proprietary
software (cf. “Why OSS does not succeed”, Gaudeul
2008).
 Among other findings, OSS almost systematically has
lower shares than proprietary software, except in some
specific areas, where freeware and OSS cohabit.
Motivation

 LATEX case study (Gaudeul 2007): focus on the

dynamics and patterns of cohabitation of
proprietary and OS software.
 Proprietary software may either dominate an area
or
 Install itself in niches not served by OSS o r
 Attach itself to OSS.
Questions

 The above notes raise several questions:

 Are each production models robust to entry by the
competing alternative production model?
 Do mixed industry models provide higher or lower
welfare than industries with a single production
model?
 What is the share of users of OS vs. proprietary
software in a mixed industry model?
Results
 The OS development model on its own may be more
efficient from the point of view of welfare than
proprietary development.
 OS industry vulnerable to entry by proprietary products.
 Proprietary industry robust to entry by OS products.
 A mixed industry where OS and proprietary development
methods co-exist may exhibit large OS projects
cohabiting with more specialized proprietary projects.
 This co-existence improves welfare vs. proprietary model,
and may do so also vs. OS.
Model
 A location model: Each product costs K to produce, and
has value g to the consumer that is closest to its location.
 A consumer that is located at distance li from the location
of the product derives utility g(1-ali) from the product.
 There are two modes of production.
 Either users contribute to collective production, with
costs shared equally.
 or an entrepreneur produces the good and sells it for
profit at price p.

 Free entry.
Equilibria
 Optimally, size s*=(4k/ag)1/2 (few large projects).
 Proprietary: size sp=(k/ag)1/2 (many small
projects).
 Open source: size sos>(2k/ag)1/2 (large projects,
but may grow too large!).
 However, size limited by risk of forking (setting up
independent project).
 Size further limited by threat of proprietary entry.
Mixed industry
 What would consumers prefer?
 OS system, with possibly less specialized projects but
requiring only low contribution?
 PS system, with possibly more specialized projects at a
higher price?
Mixed industry

 Suppose open-source and proprietary projects

alternate in the consumer's preference space.

Proprietary
Open-source
Mixed industry

 First equilibrium:
 open-source and proprietary projects are of the
same size, s p .
 Half of consumers use OSS.

 Second equilibrium:
 Open-source projects of size s * .
 Proprietary projects of size s p .
 2/3 of consumers use OSS.
Welfare
5

SW* 4 Optimal size

SWmixed
SWp 3
SW=g-K/s-ags/4
2

0
Somin Soentry0.2 Sofork 0.3 0.4 0.5
Sp S* s
-1
Welfare
5

SW* 4 Proprietary size, inefficient

SWmixed
SWp 3
SW=g-K/s-ags/4
2

0
Somin Soentry0.2 Sofork 0.3 0.4 0.5
Sp S* s
-1
Welfare
5

OS size, may be too large

SW* 4
SWmixed
SWp 3
SW=g-K/s-ags/4
2

0
Somin Soentry0.2 Sofork 0.3 0.4 0.5
Sp S* s
-1
Welfare
5
Mixed industry,
SW* 4 if second equilibrium
SWmixed
SWp 3
SW=g-K/s-ags/4
2

0
Somin Soentry0.2 Sofork 0.3 0.4 0.5
Sp S* s
-1
Extensions
 Proportion of consumers who cannot or will not use OSS.
 Proportion of consumers who “free ride” on OSS (use it
but do not or cannot develop it).
 Proportion of developers who will never buy PS.
 Dynamics in choice of location and growth of projects.
 Complementarities OS and PS:
 PS built on top of OSS (e.g. to facilitate access).
 PS using OS code.
 OSS reverse-engineering PS.