Voluntary Open-Source - The Effect Appropriability, Externality, and Uncertainty

Over the past decade, many profit-seeking technology firms voluntarily made their proprietary software open-source. In this paper, we study firm’s motivation of such voluntary open-source and its implications. Through analyzing the tradeoff between supply-side externality and demand-side appropriability, we identify the conditions under which firms will voluntarily open source. Our result highlights the importance of supply-side benefit in open-source decisions. We also find that though open-source increases product quality, it may surprisingly reduce social welfare because of over-investment in product quality. The role of loss of quality control is also investigated, where we show that cost concern may limit a firm’s incentive to open source. Finally, different firms’ incentives to open source in competition are contrasted. We find that one firm’s open-source encourages the other to follow, yet both firms could make lower profit in equilibrium. Our work deepens our understanding of this nascent phenomenon and offers advices to practitioners.