Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows

This paper analyzes a dynamic mixed duopoly in which a profit-maximizing competitor interacts with a competitor that prices at zero (or marginal cost), with the cumulation of output affecting their relative positions over time. The modeling effort is motivated by interactions between Linux, an open-source operating system, and Microsoft’s Windows in the computer server segment, and consequently emphasizes demand-side learning effects that generate dynamic scale economies (or network externalities). Analytical characterizations of the equilibrium under such conditions are offered, and some comparative static and welfare effects are examined. * We thank Miguel Angel García Cestona, Fabio Maneti, Patrick Moreton, and seminar participants at NYU, the 2003 Strategy Research Forum held in Washington University, St. Louis, the 1 Meetings of the International Industrial Organization Society, held in Boston, and the 2003 Society for the Advancement of Economic Theory (SAET) conference, held in Rodos, for useful comments. + IESE and Harvard Business School. ++ Harvard Business School.