Deciding On Software Pricing And Openness Under Competition

The success of many open source applications has motivated commercial firms to explore how they can benefit from opening their software platforms in hope of getting free high quality contributors and more complementary products. Yet the openness decision is tightly coupled with the pricing of the software (e.g. openness limits the price that can be charged) and the reinforcing feedback loops of network effects and complementary products. In this paper we explore how there interconnections impact the optimum pricing and openness decision for two firms in competition. Reinforcing loops increase the value of early market lead and put pressure on the competing firms to seek such advantage. We show that the competitive equilibrium under strong reinforcing loops calls for highly open software products with deep early discounts, which may significantly compromise the profitability of the players in the market. Proprietary platforms and higher prices are favored in the absence of these loops.