Impact of User Skills and Network Effects on the Competition between Open Source and Proprietary Software

It is found that in the presence of network effects, the proprietary software dominates the market when the open source software does not provide higher benefits to users, implying that open source software, as a low-cost substitute to proprietary software, may not survive in a market exhibiting network effects.

Abstract

Despite the availability of source code, deploying open source software (OSS) in an enterprise environment requires expertise. Recent surveys and case studies show that the skills of IT staff in an organization are one of the key factors in OSS adoption decisions. Another important factor organizations consider when choosing a platform is network effects. This paper studies how users' skills and network effects may influence the market where proprietary software (PS) competes with OSS. In the model, users make adoption decisions considering their own skills and the network effects of the software, and the vendor of PS prices its product strategically. It is found that in presence of network effects, PS dominates the market when OSS does not provider higher benefits to users. This implies that OSS as a low-cost substitute to PS cannot survive in a market exhibiting network effects. To gain market share, OSS has to outperform PS by a large margin, which can be achieved if significant portion of users are highly skilled and thus can customize the OSS to better satisfy their needs.