Linux vs.

Windows:
A comparison of application and platform innovation incentives for open
source and proprietary software platforms+
By Nicholas Economides* and Evangelos Katsamakas**

Revised September 2005

Abstract

The paper analyzes and compares the investment incentives of platform and application developers
for Linux and Windows. We find that the level of investment in applications is larger when the
operating system is open source rather than proprietary. The comparison of the levels of investment
in the operating systems depends, among others, on reputation effects and the number of
developers. The paper also develops a short case study comparing Windows and Linux and
identifies new directions for open source software research.

Keywords: open source software, operating systems, technology platforms, Linux, innovation
incentives
JEL classification: L10, L86, L31
+ We thank the editors Jurgen Bitzer and Philip Schroder for useful comments and suggestions. The authors
contributed equally and the names appear in alphabetical order.

* Stern School of Business, N.Y.U., 44 West 4th Street, New York, NY 10012, tel: 212-998-0864, ,
neconomi@stern.nyu.eduhttp://www.NETinst.org . http://www.stern.nyu.edu/networks/ and Executive Director,
NET Institute,
**
Graduate School of Business, Fordham University, 113 West 60th St, New York, NY 10023, tel: 212-636-6192,
fax: 212-765-5573, katsamakas@fordham.edu
1 DiBonna (1999), Raymond (2001) and Fink (2003) provide good practitioner overviews of open source software.
2 See http://www.idc.com.
3 eWeek reports “IDC sees double digit growth continuing for Linux,” Dec. 8 2004 at
http://www.eweek.com/article2/0,1759,1737068,00.asp.

4 See http://www.idc.com.
5 See “Yankee independently pits Windows TCO vs. Linux TCO,” Microsoft Watch, March 24 2004,
http://www.microsoft-watch.com/article2/0,1995,1553620,00.asp.
6 See “Linux kernel review shows far fewer flaws,” eWeek, Dec 14 2004, at
http://www.eweek.com/article2/0,1759,1741077,00.asp

7 Linux Standards Base (LSB), see http://www.linuxbase.org .

8 Apache’s market-share is larger than 68%, Microsoft’s IIS market-share is around 20% and the difference
between the two is increasing over time; see “Web server survey”, Netcraft, Jan 2005, at
http://news.netcraft.com/archives/2005/01/01/january_2005_web_server_survey.html.

9 See “Microsoft’s secret codes,” Wall Street Journal, Dec 22, 2004.
10 As noted in the case study (section 3), there is evidence that the total cost of ownership (TCO) of Linux is
possibly higher than the TCO of Windows, at least as for now.
 1. Introduction

Open source software is an emerging type of software that may fundamentally affect the business
and economic features of the software industry. Linux, an open source operating system, has been
the prominent example of the potential of the open source movement, competing against Microsoft
Windows, the incumbent operating system.

This paper analyzes the incentives to invest in application software and an operating system under
two different software ecosystems: one based on an open source operating system, such as Linux,
and the other based on a proprietary operating system, such as Microsoft Windows. We build a
model extending Economides and Katsamakas (2005) to compare the innovation incentives of
application developers and operating system developers for Linux and Windows. In our model,
firms and developers invest to improve the quality of the platform or the application and expand the
demand by users of these software products. When the operating system is proprietary, the platform
provider and the application provider invest only in their own product to maximize their profit.
When the operating system is open source, there is no platform provider firm, but the users invest in
the platform to maximize their user surplus and their development reputation, which depends on the
success of the platform measured by its adoption. This modeling approach is justified by other open
source research that conceptualizes the users as developers (Franke and Von Hippel 2003, Von
Hippel 2005).

Another innovation of our model is that it considers the strategic interaction between the platform
developers’ investment incentives and the application developers’ incentives. We show that this
interaction is important and shouldn’t be ignored in public policy. The existing debate of how
innovation is affected by open vs. proprietary platforms (e.g. Lessig (2001)) tends to focus only on
the innovation incentives of application providers, ignoring the relationship of these incentives with
the incentives of the platform provider.
 Beyond the analysis of investment incentives, we also present a short case study comparing
Windows vs. Linux along three dimensions: the client-side, and server-side and the interaction
between the client-side and the server-side. We emphasize that the comparison between Windows
and Linux is an issue of comparing two competing software ecosystems, not just two products. The
existing Windows ecosystem of the operating system, applications, application developers, and
service providers is competing against an emerging ecosystem centered on the Linux operating
system. The short case study enables us to identify directions for future research on open source
software.

The main findings of our analysis are the following. First, the level of investment in the
application is larger when the operating system is open source rather than proprietary when the two
operating systems are of equal quality. Second, the level of investment in the operating system
depends on a number of factors, such as the strength of the reputation effects for the developers of
the open source operating system, the ratio of developers within the total user population of the
open source operating system, the level of investment in the applications within each ecosystem and
the cost of adopting the open source operating system. An increase of one the first two factors leads
to a relative increase of the investment in the open source operating system, while an increase of the
fourth factor leads to a relative increase of the investment in the proprietary operating system.

The paper has the following structure. Section 2 reviews the related literature. Section 3 discusses
the case study of Windows vs. Linux and identifies some new research directions. Section 4,
develops the model and analyzes the innovation incentives in the two alternative software
ecosystems, the open source and the proprietary one. The conclusions section follows.
 2. Related Literature

The economics literature on open source focuses mainly on the individual incentives to participate
in open source projects, the incentives of firms to adopt open source initiatives, the business models
of firms operating within the open source landscape, and the competitive implications of open
source software (Lerner and Tirole (2004), Rossi (2004)).1 Johnson (2002) models the contribution
to an open-source project as a problem of private provision of a public good and analyzes the effect
of increasing the number of developers. Lerner and Tirole (2001, 2002) discuss the incentives of
individual programmers and software firms to participate in open source projects. They argue that
programmers are motivated by “peer recognition” and delayed career benefits such as being hired
by a software firm, or getting access to funding for future software ventures. Mustonen (2003)
proposes a model in which the participation of programmers in open-source projects is endogenous
and shows that a low implementation cost of an open-source application is crucial for its survival
when it competes with a proprietary application. Casadesus-Masanell and Ghemawat (2003) study a
dynamic setting of competition between Windows and Linux. Bitzer (2004) analyzes why some
software firms support Linux depending on the heterogeneity between Linux and the firms’
commercial product. Economides and Katsamakas (2005) analyze the strategic differences between
a proprietary and an open-source technology platform and their competition. Mustonen (2005)
analyzes when a proprietary software firm may support the development of substitute open source
software. Comino and Manenti (2005) assume informed and uninformed users about the existence
of open-source applications, and study the welfare implications of public policies supporting open-
source software.
 Perhaps the closest paper to this one is Bitzer and Schroder (2003), which also analyzes the
innovation performance of open source and proprietary software development. It shows that
competition between open source and proprietary products leads to an increase of the level of
technology of both products, as a result of increased investment. The focus of Bitzer and Schroder
(2003) is on the effect of competition on innovation, while the focus of our paper is on a direct
comparison of the innovation in the two alternative software ecosystems, which consist of
application and operating system developers.

3. Case Study: Linux vs. Windows

This case study of Linux vs. Windows distinguishes between the operating systems market for end
users – of a desktop operating system (client) – and the market for server operating systems
(server). The most interesting battle today is at the server side.

3.1 Client-side

Recent studies suggest that the market-share of Linux at the client-side is around 3% and some
expect to it reach 7% by 2007.2 This slow growth can be attributed to lack of ease of use, small
variety of applications, problems with drivers that enable users to connect other devices to their
computing systems. Linux has been mostly an operating system for power-users who have Unix-
like skills, but this may change since the open-source community is developing several friendly user
interfaces such as KDE.

Switching costs from the dominant Windows operating system make it difficult for the Linux
market-share to grow fast. Much depends on the relative availability of applications for Windows
vs. Linux and the switching costs from the Windows ecosystem to the Linux ecosystem. There are
many open source applications under development, and the open source-community has recognized
the strategic importance of making their applications similar to the Windows applications to lower
user switching costs.
 Many open source applications (such as OpenOffice, the Mozilla Firefox browser etc) are also
compatible with Windows. These applications although they increase the recognition of the open
source community, they strengthen the Windows ecosystem, therefore may hurt Linux in its
competition with Windows in the short-term. However, the existence of these open source
applications may reduce the switching cost to Linux in the long-term. At the same time, there are
many proprietary applications that are offered over the Linux operating system. Therefore, we do
not see a pure open source ecosystem competing with a pure proprietary ecosystem, but two
ecosystems both based on a mix of open source and proprietary applications. Understanding the
strategic implications of these mixed ecosystems is an interesting question for future research.

3.2 Server-side

At the server side, IDC predicts double-digit growth of Linux adoption3 and that Linux server
shipments will reach 25.7 percent of total shipments in 2008. Linux is “becoming mainstream” and
the Linux-based packaged software market is expected to exceed $14 by 2008.4
 The total cost of ownership (TCO) of Linux may be higher presently.5 The migration from
Windows environments to Linux is more costly than the migration from Unix to Linux, since Linux
is a Unix-like operating system. Therefore a significant switching cost is protecting Windows.
Both Windows and Linux are currently gaining market share at the expense of proprietary Unix
systems (including the Sun versions of Unix), which tend to be closed and expensive running on
expensive hardware.

The Linux ecosystem is developing fast in terms of number, variety and quality of applications and
availability of support and other complementary services. However, it is expected that firms that
offer competing proprietary solutions will respond in a variety of ways, including the reduction of
prices and higher investment in their products. For example, Microsoft seems committed to reduce
the security issues faced by Windows. Uncertainty about potential litigation risks due to unclear
property rights and confusing open source licenses also hurts Linux.

Sponsoring of Linux by big IT companies such as IBM and HP is affecting positively Linux
because it affects the expectations of customers about the prospects of the platform. These firms
are sponsoring Linux by developing or porting their enterprise applications to Linux (such as IBM
Websphere), participating actively in open source projects and initiatives and sometimes leading
open source projects, announcing publicly their support and their positive expectations about Linux.
Sponsoring of Linux by European and Asian governments also strengthens Linux.
 Security problems and risks are hurting Windows. An independent study has shown that Linux
kernel has 0.17 security flaws per 1,000 lines of code, compared to average 10-20 flaws of
proprietary software.6

Firms have the option to compile their own for free Linux distribution, by bundling the free Linux
kernel with select utilities, but there are several competing commercial Linux distributions (such as
Red Hat, SuSe etc). Therefore there is competition within the Linux platform itself, besides the
competition between Linux and Windows. There is a need for more research to analyze that
competition and understand the strategies of competing Linux distributors. There is an ongoing
process of standardization7 across the different distributions ensuring that a Linux application can
run on all distributions. However, it is uncertain how successful this process will be in the future
and whether the risk of “forking” to incompatible distributions will materialize. The risk of
“forking” is affecting negatively the expectations of potential adopters and the costs of application
developers for Linux, who may need to develop different versions of their applications for different
Linux distributions.

The existing literature tends to focus on the development side and not on the demand side. It is
unclear how and where firms choose to adopt Linux and open source applications. This may
depend on the existing IT infrastructure, capabilities and employee IT skills of a firm, the size and
the industry of the firm. Only firms with substantial IT capabilities and resources may switch early.
Most firms are likely to have a mix of Linux and Windows infrastructure evolving over time. For
example Linux tends to become dominant in Web serving applications, combined with Apache, the
dominant web server application that is open source.8 Prominent Internet companies such as
Google and Amazon rely heavily on Linux. There is a need for both empirical and analytical work
on the conditions under which firms adopt Linux and open source, and how this adoption behavior
affects the competition between the two ecosystems.
3.3 Interaction of Server-side and Client-side

There is also a significant relationship between the client/desktop side and the server side within an
enterprise IT infrastructure. Since Microsoft is expected to have dominance at the client operating
systems market (and many applications) for a long time this may give it an advantage at the server
market too. Alternatively, as Linux increases its presence at the server market, this may encourage
its adoption at the client market as well. The recent European Union court decision, requiring
Microsoft to publish some proprietary protocols that define the interaction of clients and servers,
may make it easier to introduce Linux clients in networks that depend on Windows servers.9

4. The Model

This section provides a brief overview of the technology platforms model of Economides and
Katsamakas (2005) and extends that model to analyze the investment incentives of different
platforms.
 ffd8ffe000104a464946000
1020100c800c80000ffe20c
584943435f50524f46494c4
500010100000c484c696e6f
021000006d6e7472524742
2058595a2007ce000200090
00600310000616373704d5
3465400000000494543207
3524742000000000000000
0000000000000f6d6000100
000000d32d485020200000
0000000000000000000000
The model consists of two software ecosystems, the first based on 0000000000000000000000 a
proprietary platform and the second based on an open source 0000000000000000000000
platform. 0000000000000000000000
0011637072740000015000
ffd8ffe000104a4649460001 The software ecosystem based on 0000336465736300000184 the
020100c800c80000ffe20c58 proprietary platform consists of 0000006c77747074000001f one
4943435f50524f46494c4500 platform firm selling the platform 000000014626b707400000 A0
010100000c484c696e6f0210 (operating system), and an 204000000147258595a000
00006d6e747252474220585 independent application developer 00218000000146758595a0
95a2007ce00020009000600 selling B (application software). 000022c000000146258595a The
310000616373704d5346540 1 0000024000000014646d6e
00000004945432073524742 platform firm sells the platform to 640000025400000070646d the
00000000000000000000000 users at a price p0. The 6464000002c40000008876
00000f6d6000100000000d3 independent application provider 7565640000034c00000086
2d485020200000000000000 sells the application to the users at 76696577000003d4000000 a
00000000000000000000000 price p . The application provider 246c756d69000003f800000
00000000000000000000000 1 0146d6561730000040c000
00000000000000000000000 pays also an access fee s to the 0002474656368000004300
00000000000011637072740 platform firm. The fee s is set by 000000c725452430000043c the
00001500000003364657363 platform firm and it can be 0000080c67545243000004
000001840000006c7774707 negative when effectively the 3c0000080c6254524300000
4000001f000000014626b70 operating system firm subsidizes 43c0000080c746578740000 the
74000002040000001472585 application developer. The 0000436f707972696768742
95a00000218000000146758 demand function of the platform 0286329203139393820486 A0
595a0000022c00000014625 is , and the demand of the 5776c6574742d5061636b6
8595a000002400000001464 application B 1726420436f6d70616e7900
6d6e6400000254000000706 0064657363000000000000
46d6464000002c400000088 The software ecosystem based on 0012735247422049454336 an
767565640000034c0000008 open source platform consists of 313936362d322e31000000
676696577000003d4000000 users-developers that help develop 0000000000000000127352 the
246c756d69000003f800000 4742204945433631393636
open source platform A0O, which 2d322e3100000000000000 is
0146d6561730000040c0000
00247465636800000430000 adopted by users for free, and an 0000000000000000000000
0000c725452430000043c00 independent application provider 000000000000000000, firm
00080c675452430000043c0 that develops and sells the where parameter d
000080c625452430000043c application B1O measures the
at price . The demand for complementarity between the
0000080c746578740000000
0436f707972696768742028 platform A the platform and the
63292031393938204865776 application. We assume that
c6574742d5061636b617264 b1, b0 > d, i.e., the own-
20436f6d70616e790000646 price effect of each product
57363000000000000001273 dominates the cross-price
52474220494543363139363 effect. The profit function
62d322e3100000000000000 of the platform firm is π0 =
00000000127352474220494
54336313936362d322e3100 p0q0 + sq1, equal to the
00000000000000000000000 platform profit from users
00000000000000000000000 plus the platform profit
0000001 is from the application access
 ffd8ffe000104a464
9460001020100c800
c80000ffe20c584943
435f50524f46494c4
ffd8ffe000104a
4649460001020
500010100000c484c
100c800c80000f
696e6f021000006d6
fe20c584943435
f50524f46494c4
e7472524742205859
500010100000c
5a2007ce000200090
484c696e6f0210
00006d6e74725
00600310000616373
247422058595a
704d5346540000000
2007ce0002000
9000600310000
04945432073524742
616373704d534
00000000000000000
6540000000049
4543207352474
00000000000f6d600
2000000000000
At 0000000000000 equilibrium, when the operating system is proprietary, the operating
0100000000d32d485
000f6d60001000 system and application profits excluding investment costs are
02020000000000000
00000d32d4850
00000000000000000
2020000000000
0000000000000
00000000000000000
ffd8ffe000104a4649460001020100c800c80000ffe20c584
0000000000000 ffd8ffe000104a4649460001020100c
00000000000000000
0000000000000
943435f50524f46494c4500010100000c484c696e6f021000 800c80000ffe20c584943435f50524f4
0000000000000
00000000000000000
006d6e74725247422058595a2007ce000200090006003100
0000000000000 6494c4500010100000c484c696e6f02
00000000000000116
0000000000000
00616373704d53465400000000494543207352474200000 1000006d6e74725247422058595a20
0000000116370
37072740000015000
00000000000000000000000f6d6000100000000d32d48502
7274000001500 07ce00020009000600310000616373
02000000000000000000000000000000000000000000000
00003364657363000
0000033646573 704d53465400000000494543207352
6300000184000
00000000000000000000000000000000000000000000000
001840000006c7774
0006c77747074 474200000000000000000000000000
00011637072740000015000000033646573630000018400
7074000001f000000
000001f0000000 00f6d6000100000000d32d48502020
14626b7074000
00006c77747074000001f000000014626b70740000020400
014626b7074000002
0020400000014
000000000000000000000000000000
0000147258595a00000218000000146758595a0000022c00
04000000147258595
7258595a00000 000000000000000000000000000000
2180000001467
0000146258595a0000024000000014646d6e640000025400
a0000021800000014
58595a0000022
000000000000000000000000000000
000070646d6464000002c400000088767565640000034c00
6758595a0000022c0
c000000146258 000011637072740000015000000033
00008676696577000003d4000000246c756d69000003f800
595a000002400
00000146258595a00 64657363000001840000006c777470
0000014646d6e
0000146d6561730000040c00000024746563680000043000
00024000000014646
6400000254000 74000001f000000014626b70740000
00000c725452430000043c0000080c675452430000043c00
00070646d6464 0204000000147258595a0000021800
d6e64000002540000
000002c400000
00080c625452430000043c0000080c746578740000000043 0000146758595a0000022c00000014
0070646d646400000
0887675656400
6f70797269676874202863292031393938204865776c6574
00034c0000008 6258595a0000024000000014646d6e
2c400000088767565
6766965770000
742d5061636b61726420436f6d70616e7900006465736300 640000025400000070646d64640000
640000034c0000008
03d4000000246
00000000000012735247422049454336313936362d322e31
ffd8ffe000104a4649460001020100c800c8
02c400000088767565640000034c00
c756d69000003f 0000ffe20c584943435f50524f46494c45000
676696577000003d4
8000000146d65
00000000000000000000001273524742204945433631393 10100000c484c696e6f021000006d6e74725
00008676696577000003d400000024
000000246c756d690
61730000040c0
6362d322e310000000000000000000000000000000000000
247422058595a2007ce00020009000600310
6c756d69000003f8000000146d6561
0000024746563 000616373704d53465400000000494543207
00003f8000000146d
00000000000000000,
6800000430000 730000040c00000024746563680000
35247420000000000000000000000000000f
6561730000040c000
0000c72545243 6d6000100000000d32d48502020000000000
04300000000c725452430000043c00
0000043c00000 respectively. Alternatively, 000000000000000000000000000000000000
00024746563680000
80c6754524300 00080c675452430000043c0000080c
000000000000000000000000000000000000
when the operating system is
04300000000c72545
00043c0000080 000000000000011637072740000015000000
625452430000043c0000080c746578
open c625452430000 source, 03364657363000001840000006c777470740
ffd8ffe000104a4649460001020100c800c8
2430000043c000008
043c0000080c7
equilibrium 7400000000436f7079726967687420
00001f000000014626b70740000020400000
0000ffe20c584943435f50524f46494c45000
0c675452430000043
4657874000000 0147258595a00000218000000146758595a0
2863292031393938204865776c6574
10100000c484c696e6f021000006d6e74725
00436f70797269 profits are 247422058595a2007ce00020009000600310
000022c000000146258595a0000024000000
, c0000080c62545243
6768742028632 742d5061636b61726420436f6d7061
014646d6e640000025400000070646d64640
000616373704d5346540000000049454320
0000043c0000080c7
9203139393820 00002c400000088767565640000034c00000
6e7900006465736300000000000000
73524742000000000000000000000000000
4865776c65747 08676696577000003d4000000246c756d690
0f6d6000100000000d32d485020200000000
46578740000000043
42d5061636b61 12735247422049454336313936362d
00003f8000000146d6561730000040c00000
00000000000000000000000000000000000
6f707972696768742
726420436f6d70 322e31000000000000000000000012
02474656368000004300000000c725452430
00000000000000000000000000000000000
616e790000646 000043c0000080c675452430000043c00000
00000000000000000116370727400000150
02863292031393938
5736300000000 735247422049454336313936362d32
80c625452430000043c0000080c746578740
0000003364657363000001840000006c777
204865776c6574742
0000001273524 2e3100000000000000000000000000
0000000436f7079726967687420286329203
47074000001f000000014626b70740000020
7422049454336 1393938204865776c6574742d5061636b617
d5061636b61726420
313936362d322
0000000000000000000000000000,
4000000147258595a000002180000001467
26420436f6d70616e7900006465736300000
58595a0000022c000000146258595a000002
436f6d70616e79000
e310000000000 000000000127352474220494543363139363
4000000014646d6e6400000254000000706
0000000000001 62d322e31000000000000000000000012735
46d6464000002c400000088767565640000
06465736300000000
2735247422049 247422049454336313936362d322e3100000
034c0000008676696577000003d40000002
00000012735247422
4543363139363 000000000000000000000000000000000000
46c756d69000003f8000000146d656173000
62d322e310000 00000000000001
0040c000000247465636800000430000000
04945433631393636
0000000000000 O
0c725452430000043c0000080c6754524300 is . Under open source,
2d322e31000000000
0000000000000 00043c0000080c625452430000043c000008
the profit function of the operating system is
0000000000000 0c7465787400000000436f70797269676874
00000000000001273
000000000000 202863292031393938204865776c6574742
O zero and the profit function of the
52474220494543363 d5061636b61726420436f6d70616e7900006
46573630000000000000012735247422049
13936362d322e3100
is , and the application provider is . We also assume that
454336313936362d322e310000000000000
00000000000000000
demand for the 00000000012735247422049454336313936
open source platform users may face an
362d322e310000000000000000000000000
00000000000000000
application is B 00000000000000000000000000000
additional exogenous adoption cost c
 ffd8ffe000104a
4649460001020
100c800c80000f
fe20c584943435
f50524f46494c4
500010100000c
484c696e6f0210
00006d6e74725
247422058595a
2007ce00020009
0006003100006
16373704d5346
and the combined 5400000000494 consumer surplus from the operating systems and applications
markets is 5432073524742
0000000000000
0000000000000
The following 00f6d600010000 section extends this basic framework by introducing new
modeling features 0000d32d48502 and assumptions that enable us to analyze and compare the
innovation 0200000000000 incentives in the two ecosystems.
0000000000000
Innovation 0000000000000 Incentives
0000000000000
Before the 0000000000000 operating systems and the applications are offered to users as
defined above, 0000000000000 the software firms and individual developers may invest in
increasing 0000000000000
0000001163707
ffd8ffe000104a4649460001020100c800
2740000015000
c80000ffe20c584943435f50524f46494c4
0000336465736
500010100000c484c696e6f021000006d6
3000001840000
e74725247422058595a2007ce000200090
006c777470740
00600310000616373704d5346540000000
00001f00000001
0494543207352474200000000000000000
4626b70740000
ffd8ffe000104a4649460001020100c800c80000ffe20c
00000000000f6d6000100000000d32d485
0204000000147
584943435f50524f46494c4500010100000c484c696e6f
0202000000000000000000000000000000
258595a000002
021000006d6e74725247422058595a2007ce000200090
0000000000000000000000000000000000
1800000014675
00600310000616373704d53465400000000494543207
0000000000000000000000000000000116
8595a0000022c0
35247420000000000000000000000000000f6d6000100
3707274000001500000003364657363000
0000014625859
000000d32d4850202000000000000000000000000000
001840000006c77747074000001f000000
5a00000240000
00000000000000000000000000000000000000000000
014626b707400000204000000147258595
00014646d6e64
00000000000000000000000011637072740000015000
a00000218000000146758595a0000022c0
0000025400000
00003364657363000001840000006c77747074000001f
070646d646400
00000146258595a0000024000000014646
000000014626b707400000204000000147258595a0000
0002c40000008
d6e640000025400000070646d646400000
0218000000146758595a0000022c000000146258595a0
8767565640000
2c400000088767565640000034c0000008
000024000000014646d6e640000025400000070646d64
034c000000867
676696577000003d4000000246c756d690
64000002c400000088767565640000034c00000086766
6696577000003
00003f8000000146d6561730000040c000
96577000003d4000000246c756d69000003f800000014
d4000000246c7
0002474656368000004300000000c72545
6d6561730000040c00000024746563680000043000000
56d69000003f80
2430000043c0000080c675452430000043
00c725452430000043c0000080c675452430000043c00
00000146d6561
c0000080c625452430000043c0000080c7
00080c625452430000043c0000080c746578740000000
730000040c000
465787400000000436f707972696768742
0436f7079726967687420286329203139393820486577
0002474656368
02863292031393938204865776c6574742
6c6574742d5061636b61726420436f6d70616e7900006
0000043000000
d5061636b61726420436f6d70616e79000
46573630000000000000012735247422049454336313
00c7254524300
0646573630000000000000012735247422
936362d322e3100000000000000000000001273524742
00043c0000080c
049454336313936362d322e31000000000
2049454336313936362d322e310000000000000000000
6754524300000
0000000000000127352474220494543363
00000000000000000000000000000000000.
43c0000080c625
13936362d322e310000000000000000000
452430000043c
0000000000000000000000000000000000
0000080c74657
0,
8740000000043
6f707972696768
7420286329203
1393938204865
 ffd8ffe000104a464
ffd8ffe00010 ffd8ffe0
9460001020100c80
4a4649460001 00104a46
0c80000ffe20c5849
020100c800c8 49460001
43435f50524f46494
0000ffe20c584 020100c8
c4500010100000c4
943435f50524 00c80000
84c696e6f02100000
f46494c45000 ffe20c584
6d6e747252474220
10100000c484 943435f5
58595a2007ce00020
c696e6f02100 0524f464
0090006003100006
0006d6e74725 94c45000
16373704d5346540
247422058595 10100000
0000000494543207
a2007ce00020 c484c696
3524742000000000
009000600310 e6f02100
0000000000000000
000616373704 0006d6e7
When the operating system is proprietary, we assume that 000f6d60001000000
d53465400000 47252474 (a)
each firm invests in its product to maximize its profit; and 00d32d4850202000
000494543207 22058595 (b)
neither the users nor the application providers invest in the 0000000000000000
352474200000 a2007ce0
platform, because the platform is closed. For example the 0000000000000000
000000000000 00200090
quality of Microsoft Windows depends almost exclusively 0000000000000000
00000000000f 00600310 on
Microsoft’s investment in this operating system. 0000000000000000
6d6000100000 00061637
0000000000000000
000d32d48502 3704d534
When the operating system is open source, we assume 0000000000001163
020000000000 65400000 that
there are D users that are developers, and define the 7072740000015000
000000000000 00049454
proportion of such users as 0000336465736300
000000000000 32073524
0001840000006c77
000000000000 74200000
The game now has an investment stage that precedes the 747074000001f0000
000000000000 00000000 two
pricing stages described at the beginning of section 4. We 00014626b7074000
000000000000 00000000
assume that the investment has a fixed cost reflecting the 0020400000014725
000000000000 0000000f high
fixed cost and low variable cost structure of software 8595a00000218000
000000000000 6d600010
development. We assume that, by investing in a product 000146758595a000011637072740 0000000d
(operating system or application), the sponsor is able to 0022c00000014625
000015000000 32d48502 push
outwards (increase) the demand for the product, here 8595a00000240000
033646573630 02000000
measured by the parameter ai. The firm incurs a fixed cost 00014646d6e64000
000018400000 00000000
0025400000070646
06c777470740 00000000
indicated by the increasing and convex investment
d6464000002c4000
00001f000000 00000000
function C(ai).
0008876756564000
014626b70740 00000000
0034c00000086766
000020400000 00000000
96577000003d4000
0147258595a0 00000000
000246c756d69000
000021800000 00000000
003f8000000146d65
0146758595a0 00000000
61730000040c0000
000022c00000 00000000
0024746563680000
0146258595a0 00000000
04300000000c7254
000024000000 00000000
52430000043c0000
014646d6e640 01163707
080c675452430000
000025400000 27400000
043c0000080c6254
070646d64640 15000000
52430000043c0000
00002c400000 03364657
080c746578740000
088767565640 36300000
0000436f707972696
000034c00000 18400000
7687420286329203
086766965770 06c77747
1393938204865776
00003d400000 07400000
c6574742d5061636
0246c756d690 1f000000
b61726420436f6d70
00003f800000 014626b7
616e790000646573
0146d6561730 07400000
6300000000000000
000040c00000 20400000
1273524742204945
024746563680 01472585
4336313936362d32
000043000000 95a00000
2e31000000000000
00c725452430 21800000
0000000000127352
000043c00000 01467585
4742204945433631
80c675452430 95a00000
3936362d322e3100
000043c00000 22c00000
0000000000000000
80c625452430 01462585
Assuming concavity of the profit functions, optimal choice of investment for profit maximization
when the operating system is proprietary requires:

Operating System:
Application: ffd8ffe000104a4649460001020100c800c80000ffe
20c584943435f50524f46494c4500010100000c484
The developer utility c696e6f021000006d6e74725247422058595a2007c
maximization and ffd8ffe000104a4649460001020100c800c80000ffe20c5
e00020009000600310000616373704d5346540000 application
firm profit maximization 84943435f50524f46494c4500010100000c484c696e6f0
00004945432073524742000000000000000000000 conditions
when the operating system is 21000006d6e74725247422058595a2007ce0002000900
0000000f6d6000100000000d32d48502020000000 open-source
are: 0600310000616373704d5346540000000049454320735
00000000000000000000000000000000000000000
247420000000000000000000000000000f6d600010000
00000000000000000000000000000000000000000
Oper. Syst.: 0000d32d4850202000000000000000000000000000000
00000011637072740000015000000033646573630
Application: 000000000000000000000000000000000000000000000
00001840000006c77747074000001f00000001462
000000000000000000001163707274000001500000003
6b707400000204000000147258595a00000218000
We can now prove the 364657363000001840000006c77747074000001f00000
000146758595a0000022c000000146258595a0000 following
proposition 0014626b707400000204000000147258595a000002180
024000000014646d6e640000025400000070646d6
comparing 00000146758595a0000022c000000146258595a000002
464000002c400000088767565640000034c000000
ffd8ffe000104a4649460001020100c800c80000ffe20c584943435f50524f46494c4
investment 4000000014646d6e640000025400000070646d6464000
8676696577000003d4000000246c756d69000003f
500010100000c484c696e6f021000006d6e74725247422058595a2007ce00020009
ffd8ffe000104a4649460001020100c800c8
002c400000088767565640000034c0000008676696577
8000000146d6561730000040c0000002474656368
000600310000616373704d53465400000000494543207352474200000000000000
incentives in
0000ffe20c584943435f50524f46494c4500
000003d4000000246c756d69000003f8000000146d656
000004300000000c725452430000043c0000080c6
00000000000000f6d6000100000000d32d485020200000000000000000000000000
operating
010100000c484c696e6f021000006d6e7472
1730000040c0000002474656368000004300000000c72
75452430000043c0000080c625452430000043c00
000000000000000000000000000000000000000000000000000000000000000000
systems and
5247422058595a2007ce000200090006003
5452430000043c0000080c675452430000043c0000080
00080c7465787400000000436f707972696768742
applications in 0001163707274000001500000003364657363000001840000006c7774707400000
10000616373704d53465400000000494543
c625452430000043c0000080c7465787400000000436f7
02863292031393938204865776c6574742d506163
1f000000014626b707400000204000000147258595a00000218000000146758595a
the two
20735247420000000000000000000000000
0797269676874202863292031393938204865776c6574
6b61726420436f6d70616e7900006465736300000
ecosystems, as 0000022c000000146258595a0000024000000014646d6e640000025400000070646
000f6d6000100000000d32d485020200000
742d5061636b61726420436f6d70616e7900006465736
00000000012735247422049454336313936362d32
d6464000002c400000088767565640000034c0000008676696577000003d400000
described by
00000000000000000000000000000000000
30000000000000012735247422049454336313936362d
2e310000000000000000000000127352474220494
equations (1)- 0246c756d69000003f8000000146d6561730000040c000000247465636800000430
00000000000000000000000000000000000
322e31000000000000000000000012735247422049454
54336313936362d322e3100000000000000000000
0000000c725452430000043c0000080c675452430000043c0000080c62545243000
(4).
00000000000000000000116370727400000(1)
336313936362d322e3100000000000000000000000000
0000000000000000000000000000000000,
0043c0000080c7465787400000000436f7079726967687420286329203139393820
1500000003364657363000001840000006c
0000000000000000000000000000. (2)
Proposition 1. 4865776c6574742d5061636b61726420436f6d70616e79000064657363000000000
77747074000001f000000014626b7074000
(a) Provided 0000012735247422049454336313936362d322e310000000000000000000000127
00204000000147258595a00000218000000
that the 35247422049454336313936362d322e31000000000000000000000000000000000
000000000000000000000,146758595a0000022c000000146258595a0
(3)
cost
000024000000014646d6e64000002540000
function for software development is
0070646d6464000002c4000000887675656
the same for open source and proprietary
40000034c0000008676696577000003d400
developers and that the open source operating
0000246c756d69000003f8000000146d656
system is offered for free, investment in the
1730000040c000000247465636800000430
application is higher when the operating
0000000c725452430000043c0000080c675
system is open source, i.e., .
452430000043c0000080c62545243000004
3c0000080c7465787400000000436f70797
26967687420286329203139393820486577
6c6574742d5061636b61726420436f6d706
16e79000064657363000000000000001273
5247422049454336313936362d322e31000
00000000000000000001273524742204945
4336313936362d322e31000000000000000
00000000000000000000000000000000000
0000. (4)
 ffd8ffe000104 ffd8ffe000104ffd8ffe00010ffd8ffe00 ffd8ffe0
ffd8ffe000104
a46494600010 a464946000102 0104a464
4a4649460001 a464946000102
00104a46
20100c800c800 0100c800c8000 94600010
020100c800c8 0100c800c8000
49460001
00ffe20c58494 0ffe20c5849434 20100c80
0000ffe20c584 0ffe20c584943
020100c8
3435f50524f46 35f50524f46494 0c80000ff
943435f50524f 435f50524f464
00c80000
494c45000101 c450001010000 e20c5849
46494c450001 94c4500010100
ffe20c584
00000c484c696 0c484c696e6f02 43435f50
0100000c484c 000c484c696e6
943435f5
e6f021000006d 1000006d6e747 524f4649
696e6f021000 f021000006d6e
0524f464
6e7472524742 2524742205859 4c450001
006d6e747252 747252474220
94c45000
2058595a2007c 5a2007ce00020 0100000c
47422058595a 58595a2007ce0
10100000
0090006003100 484c696e 002000900060
e00020009000 2007ce000200 c484c696
00616373704d5 6f021000 031000061637
600310000616 090006003100 e6f02100
3465400000000 006d6e74 3704d5346540
373704d53465 00616373704d 0006d6e7
4945432073524 72524742 000000049454
400000000494 7420000000000 534654000000
2058595a compare the 47252474
320735247420
Proof: First,
543207352474 0000000000000 004945432073
2007ce00 conditions of the 22058595
000000000000
maximization
200000000000 00000f6d60001 524742000000
02000900 equations (2) and (4). a2007ce0
000000000000
applications,
000000000000 000000000000
00000000d32d4 06003100 00200090
000f6d6000100
Since
ffd8ffe000104a464946000102010
00000f6d60001 8502020000000 0000000000f6
00616373 00600310
000000d32d48
0c800c80000ffe20c584943435f505
00000000d32d 0000000000000 d60001000000
704d5346 00061637
502020000000
24f46494c4500010100000c484c69
485020200000 0000000000000 00d32d485020
54000000 the marginal value of 3704d534
000000000000
First, assume that
6e6f021000006d6e7472524742205
000000000000 200000000000
0000000000000 00494543 for the open source 65400000
000000000000
reputation is zero
8595a2007ce000200090006003100
000000000000 0000000000000 000000000000
20735247 if 00049454
000000000000
developers. Then
00616373704d5346540000000049
000000000000 0000000000000 000000000000
42000000 32073524
000000000000
4543207352474200000000000000
000000000000 0000000000000 000000000000
00000000 74200000
000000000000
00000000000000f6d600010000000
000000000000 0000000000116 000000000000
00000000 00000000
000000000000
0d32d48502020000000000000000
000000000000 3707274000001 000000f6
000000000000 000000000000
00000000
0000000000000000000000000000
5000000033646 d6000100 000011637072
000000000000 000000000000 0000000f
0000000000000000000000000000
5736300000184 000000d3 740000015000
000000116370 000000000000 6d600010
0000000000000000000000011637
0000006c77747 2d485020 000033646573
727400000150 116370727400 0000000d
0727400000150000000336465736
074000001f000 20000000 630000018400
000000336465
3000001840000006c777470740000000150000000 32d48502
736300000184 000014626b707 00000000
336465736300 00006c7774707
02000000
01f000000014626b7074000002040
4000002040000 00000000 4000001f00000
0000006c7774 000184000000
ffd8ffe000104a4649460001020100c800c80000ffe20c5
00000147258595a00000218000000 00000000
7074000001f00 00147258595a0 00000000
6c7774707400 0014626b7074
00000000
84943435f50524f46494c4500010100000c484c696e6f02
146758595a0000022c00000014625
0000218000000 00000000 000002040000
0000014626b7 0001f0000000
1000006d6e74725247422058595a2007ce000200090006
8595a0000024000000014646d6e64 00000000
146758595a000 00000000 00147258595a0
074000002040 14626b707400
00310000616373704d5346540000000049454320735247
0000025400000070646d64640000 00000000
0022c00000014 00000000 000021800000
000001472585 000204000000
420000000000000000000000000000f6d6000100000000
02c400000088767565640000034c0 00000000
6258595a00000 00000000 0146758595a00
95a000002180
000008676696577000003d400000 147258595a00
d32d485020200000000000000000000000000000000000 00000000
2400000001464 00000000 00022c0000001
000001467585
0246c756d69000003f8000000146d000218000000
0000000000000000000000000000000000000000000000
6d6e640000025 00000000 00000000
46258595a0000
95a0000022c00
6561730000040c000000247465636146758595a00
0000000000000011637072740000015000000033646573
400000070646d 00000000 00000000
024000000014
000014625859
8000004300000000c72545243000000022c000000
63000001840000006c77747074000001f000000014626b
6464000002c40 00000000 00000000
646d6e6400000
5a0000024000
043c0000080c675452430000043c0146258595a00
707400000204000000147258595a000002180000001467
0000088767565 11637072 00000000
254000000706
000080c625452430000043c000008
000014646d6e 000240000000
58595a0000022c000000146258595a0000024000000014
640000034c000 74000001 00000000
46d646400000
0c7465787400000000436f7079726
640000025400 14646d6e6400
646d6e640000025400000070646d6464000002c4000000
0008676696577 50000000 01163707
2c40000008876
9676874202863292031393938204
000070646d64 000254000000
88767565640000034c0000008676696577000003d40000
000003d400000 33646573 27400000
756564000003
865776c6574742d5061636b617264
64000002c400 0246c756d6900 70646d646400
63000001
00246c756d69000003f8000000146d6561730000040c00 15000000
4c00000086766
20436f6d70616e790000646573630
000088767565 0003f80000001 0002c4000000
84000000 03364657
96577000003d
00002474656368000004300000000c725452430000043c
0000000000000127352474220494
640000034c00 46d6561730000 887675656400
6c777470 36300000
4000000246c75
0000080c675452430000043c0000080c62545243000004
54336313936362d322e3100000000
000086766965 040c000000247 00034c000000
74000001 18400000
6d69000003f80
3c0000080c7465787400000000436f7079726967687420
0000000000000012735247422049
77000003d400 4656368000004 867669657700
f0000000 06c77747
00000146d656
2863292031393938204865776c6574742d5061636b6172
454336313936362d322e310000000
0000246c756d 300000000c725 14626b70
0003d4000000
6420436f6d70616e790000646573630000000000000012 1730000040c00
07400000
0000000000000000000000000000
452430000043c 74000002 000024746563
69000003f8000 246c756d6900
735247422049454336313936362d322e31000000000000 1f000000
0000000000000000000
0000080c67545 for all , and
04000000 680000043000
000146d65617 0003f8000000
000000000012735247422049454336313936362d322e31 014626b7
the cost function is convex in , it 14725859
2430000043c00 00000c7254524
30000040c000 146d65617300
0000000000000000000000000000000000000000000000 07400000
follows that .00080c6254524
Now compare the 5a000002 30000043c0000
000247465636 (5). 00040c000000
00000000conditions
maximization of the 18000000 20400000
800000430000 30000043c0000 247465636800 080c675452430
01472585
operating systems. Because
080c746578740 the 14675859 000043c000008
0000c7254524 is convex,000430000000
cost function0000000436f70 the 95a00000
30000043c000 5a000002 0c62545243000
the open 0c7254524300
investment in7972696768742 source 2c000000 21800000
0043c0000080c
0080c6754524
operating system 00043c000008
is larger if and 14625859 01467585
0286329203139 746578740000
30000043c000
only if 0c6754524300 95a00000
 ffd8ffe000104
ffd8ffe00010
ffd8ffe00010
ffd8ffe000104
ffd8ffe000104a4
ffd8ffe000104ffd8ffe000104ffd8ffe000104a
ffd8ffe000104a
4a4649460001
a464946000102
a46494600010 64946000102010
4a464946000a464946000102
4649460001020
a46494600010246494600010201
020100c800c8
0100c800c8000
20100c800c80 0c800c80000ffe2
1020100c8000100c800c8000
100c800c80000f
0100c800c800000c800c80000ffe
0000ffe20c584
0ffe20c5849434
000ffe20c5849 0c584943435f505
0ffe20c584943
c80000ffe20c fe20c584943435
0ffe20c58494320c584943435f5
943435f50524
35f50524f46494
43435f50524f4 24f46494c450001
435f50524f464
584943435f50 f50524f46494c4
435f50524f4640524f46494c450
f46494c45000
c450001010000
6494c4500010 0100000c484c696
94c4500010100
524f46494c45 500010100000c4
94c45000101000010100000c484
10100000c484
0c484c696e6f02
100000c484c6 e6f021000006d6e
00010100000000c484c696e6
84c696e6f02100
000c484c696e6c696e6f0210000
c696e6f02100
1000006d6e747
96e6f02100000 74725247422058
f021000006d6e
c484c696e6f0 0006d6e7472524
f021000006d6e06d6e747252474
0006d6e74725
2524742205859
6d6e74725247 595a2007ce00020
21000006d6e7472524742207422058595a200
747252474220 22058595a2007c
247422058595
5a2007ce00020
422058595a20 00900060031000
7472524742258595a2007ce0
7ce00020009000
58595a2007ce0e0002000900060
a2007ce00020
0090006003100
0616373704d534
0020009000606003100006163
002000900060
07ce00020009058595a2007 03100006163737
009000600310
00616373704d5
65400000000494
03100006163773704d5346540
031000061637
000600310000ce000200090 04d53465400000
000616373704
3465400000000
54320735247420
3704d53465400000000494543
3704d5346540
616373704d5300600310000 00049454320735 The proposition suggests
d53465400000
4945432073524
00000000000000
0000000494542073524742000
000000049454 that the investment in
465400000000616373704d5
000494543207
7420000000000
0000000000000f6
320735247420 32073524742024742000000000 the application is
0000000000000
49454320735234654000000
352474200000
0000000000000
d6000100000000
000000000000 00000000000000000000000000 stronger when the
000000000000f6
47420000000000494543207
000000000000
00000f6d60001
d32d4850202000
000000000000 00000000000000000f6d600010 operating system is open
d600010000000
00000000000035247420000
00000000000f
00000000d32d4
00000000000000
000f6d6000100
0d32d48502020
000f6d60001000000000d32d485 source. However, the
00000000f6d60
00000000000
6d6000100000
8502020000000
00000000000000
000000d32d48 000000d32d4802020000000000 comparison of
0000000000000
00100000000d00000000000
000d32d48502
0000000000000
00000000000000
502020000000 50202000000000000000000000 investment levels in the
0000000000000
32d48502020000f6d6000100
020000000000
0000000000000
00000000000000
000000000000 00000000000000000000000000 operating system is
0000000000000
000000000000000000d32d4
000000000000
0000000000000
00000000000000
000000000000 00000000000000000000000000 ambiguous. When there
0000000000000
00000000000085020200000
000000000000
0000000000000
00000000000000
000000000000 00000000000000000000000000 are strong reputation
0000000000000
00000000000000000000000
000000000000
0000000000000
00000000116370
000000000000 00000000000000000000000000 effects from
0000000000000
00000000000000000000000
000000000000
0000000000000
72740000015000
000000000000 00000000000000000000000000 participation in the
0000000000000
00000000000000000000000
000000000000
0000000000116
00003364657363
000000000000 00000000000001163707274000 development of the open
0001163707274
000000000000
3707274000001
000000000000 00000184000000
000000000000000000000000000015000000
00000000000000150000000336 source operating system,
000000000000
5000000033646
or 000000000000 6c777470740000
000000000000000116370720336465736300
00001163707246573630000018 a significant proportion
011637072740
5736300000184
of 000000000116 01f000000014626
000000000007400000150000001840000006c
74000001500040000006c77747 the users have also
000015000000
0000006c77747
370727400000 b7074000002040
000000000000000336465737774707400000
000033646573074000001f0000 development skills, then
033646573630
074000001f000
150000000336 00000147258595
000000000006300000184001f000000014626
63000001840000014626b70740 the investment in the
000018400000
000014626b707
465736300000 a0000021800000
0011637072700006c7774707
b707400000204
00006c777470700002040000001 open source operating
06c777470740
4000002040000
1840000006c7 0146758595a000
400000150004000001f00000
0000001472585
4000001f0000047258595a00000 system is also larger
00001f000000
00147258595a0
774707400000 0022c000000146
000033646570014626b707495a00000218000
0014626b7074 21800000014675 than the investment of a
014626b70740
0000218000000
1f00000001462 258595a0000024
36300000184000002040000000146758595a0
000002040000 8595a0000022c0 firm controlling a
000020400000
146758595a000
000000014646d6
00147258595a0
000022c0000001
00147258595a0
6b70740000020000006c777 00000146258595 proprietary operating
0147258595a0
0022c00000014
e6400000254000
00002180000046258595a00000
000021800000
04000000147247074000001f a0000024000000 system. The proposition
000021800000
6258595a00000
00070646d64640
0146758595a00
2400000001464
0146758595a00
58595a00000200000001462 014646d6e64000 captures both the
0146758595a0
2400000001464
00002c40000008
00022c0000001
6d6e6400000254
00022c0000001
1800000014676b707400000
000022c00000
6d6e640000025
87675656400000
46258595a0000
00000070646d6
46258595a000000254000000706
ffd8ffe000104a4649460001020100c800c80000ffe20c584
58595a00000220400000014
0146258595a0
400000070646d
34c00000086766
024000000014464000002c4000
024000000014 46d6464000002c
943435f50524f46494c4500010100000c484c696e6f021000
2c00000014627258595a000
000024000000
6464000002c40
96577000003d40
646d6e6400000
0008876756564
646d6e640000040000008876756
006d6e74725247422058595a2007ce000200090006003100
58595a00000200218000000
014646d6e640
0000088767565
00000246c756d6
2540000007060000034c000000
254000000706 5640000034c000
00616373704d534654000000004945432073524742000000
400000001464146758595a0
000025400000
640000034c000
9000003f8000000
46d6464000008676696577000
46d646400000 00086766965770
0000000000000000000000f6d6000100000000d32d485020
6d6e64000002000022c0000
070646d64640
0008676696577
146d6561730000
2c40000008876
003d400000024
2c4000000887600003d40000002
200000000000000000000000000000000000000000000000
54000000706400146258595
00002c400000
000003d400000
040c0000002474
7565640000036c756d69000003
756564000003 46c756d6900000
000000000000000000000000000000000000000000000000
6d6464000002a0000024000
088767565640
0246c756d6900
65636800000430
4c00000086766
f8000000146d65
4c000000867663f8000000146d6
116370727400000150000000336465736300000184000000
c40000008876000014646d6
000034c00000
0003f80000001
0000000c725452
96577000003d61730000040c00
96577000003d 561730000040c0
6c77747074000001f000000014626b707400000204000000
756564000003e6400000254
086766965770
46d6561730000
430000043c0000
4000000246c75
0000247465636
4000000246c7500000247465636
147258595a00000218000000146758595a0000022c000000
4c000000867600000070646
00003d400000
040c000000247
080c6754524300
6d69000003f80
8000004300000
6d69000003f8080000043000000
146258595a0000024000000014646d6e6400000254000000
696577000003d6464000002
0246c756d690
4656368000004
00043c0000080c6
00000146d656000c7254524300
00000146d656 00c72545243000
70646d6464000002c400000088767565640000034c000000
00003f800000
300000000c725
d4000000246c 25452430000043
c40000008871730000040c00
00043c0000080c
1730000040c000043c0000080c6
8676696577000003d4000000246c756d69000003f8000000
0146d6561730
452430000043c
756d69000003f c0000080c746578
675656400000000247465636754524300000
000024746563 75452430000043
146d6561730000040c000000247465636800000430000000
000040c00000
0000080c67545
8000000146d6 7400000000436f7
034c000000868000004300043c0000080c625
680000043000 c0000080c62545
0c725452430000043c0000080c675452430000043c000008
024746563680
2430000043c00
561730000040 07972696768742
6766965770000000c7254524
452430000043c0
00000c72545242430000043c000
0c625452430000043c0000080c7465787400000000436f70
000043000000
00080c6254524
c00000024746 02863292031393
0003d40000030000043c0000
000080c7465787
30000043c00000080c746578740
797269676874202863292031393938204865776c6574742d
00c725452430
30000043c0000
563680000043 938204865776c6
0246c756d69080c675452430
400000000436f7
080c6754524300000000436f707
5061636b61726420436f6d70616e79000064657363000000
000043c00000
080c746578740
00000000c725 574742d5061636
000043c000008
000003f80000 0797269676874
000043c00000897269676874202
0000000012735247422049454336313936362d322e310000
80c675452430
0000000436f70
452430000043 b61726420436f6d
00146d656170c62545243000
2028632920313
0c6254524300086329203139393
000043c00000
7972696768742
70616e79000064
0043c0000080c 00000000000000000012735247422049454336313936362d
9393820486577
0043c0000080c
c0000080c67530000040c00 8204865776c657
322e31000000000000000000000000000000000000000000
80c625452430
0286329203139
65736300000000
7465787400006c6574742d5061
746578740000
45243000004300002474656 4742d5061636b6
000000000000 is sufficient to fulfill (5) and result in .
reputation benefits and the usage benefits of participants in widely adopted open source projects.

The application provider for the open source operating system invests more than the application
provider for the proprietary operating system, because the first has a larger marginal profit for all
levels of investment. This is because the open source operating system is adopted by users for free,
enabling the application provider to set a larger price and capture a larger profit than the application
provider for the proprietary operating system.

The level of investment in the applications affects the level of investment in the operating system,
because of the complementarity between the application and the operating system. In particular,
when the level of investment in the application increases, the marginal benefit of investing in the
operating system decreases, as shown in equations (1) and (3).

Exogenous factors that reduce the adoption of the open-source operating system, such as a large
adoption cost cu, decrease the incentives of individual developers to invest in the open source
operating system. Therefore, an independent application provider may subsidize the adoption of the
open source platform not only to increase the sales of its application, but also to increase the
incentives of developers to invest in the operating system.
 ffd8ffe00
0104a464
94600010
20100c80
0c80000ff
e20c5849
43435f505
ffd8ffe000104a464946000124f46494c
020100c800c80000ffe20c58 45000101
4943435f50524f46494c4500 00000c48
010100000c484c696e6f02104c696e6f0
00006d6e747252474220585 21000006
95a2007ce00020009000600 d6e74725
310000616373704d5346540 24742205
00000004945432073524742 8595a200
5. Conclusion 00000000000000000000000 7ce00020
We developed a model to compare the incentives to invest 00000f6d6000100000000d3 00900060
in the operating system and its applications both under open 2d485020200000000000000 03100006
source and proprietary operating systems. We found that the 00000000000000000000000 16373704
comparison of the levels of investment in the operating 00000000000000000000000 d5346540
systems is ambiguous, but the investment in applications is 00000000000000000000000 00000004
stronger when the operating system is open source. 00000000000011637072740 94543207
00001500000003364657363 35247420
These results were developed under the assumption that the 000001840000006c7774707 00000000
productivity of investment is the same for a proprietary and 4000001f000000014626b70 00000000
an open source system. This is an issue where there is 74000002040000001472585 00000000
significant disagreement, and both sides (for profit software 95a00000218000000146758 000f6d600
companies and open source developers) claim that their 595a0000022c00000014625 01000000
productivity is higher. This clearly is an open research 8595a000002400000001464 00d32d48
issue, but the purposes of this paper a change of the 6d6e6400000254000000706 50202000
assumption of the equal productivity of investment in both 46d6464000002c400000088 00000000
environments will tend to change our result in favor of the 767565640000034c0000008 00000000
ecosystem that is assumed to have higher productivity. For 676696577000003d4000000 00000000
example, if it is assumed that the productivity of the open 246c756d69000003f800000000000000
source development is larger than the productivity of 146d6561730000040c00000 00000000
proprietary software development, then 02474656368000004300000 00000000
000c725452430000043c000 00000000
An interesting extension of the current model would be the 0080c675452430000043c00 00000000
analysis of the innovation incentives in a competitive setting 00080c625452430000043c0 00000000
and the dynamics of innovation. 000080c7465787400000000 00000000
436f7079726967687420286 00000000
We also developed a short case study of Linux vs. 3292031393938204865776c 00001163
Windows. The discussion distinguished between issues that 6574742d5061636b6172642 70727400
affect the competition at the client-side, the server-side and 0436f6d70616e7900006465700015000
the interaction between the client-server sides. Besides the 36300000000000000127352 00003364
competition between Linux and Windows, there is a need 47422049454336313936362 65736300
for more research to analyze and understand the strategies d322e310000000000000000 00018400
of competing Linux distributors. Also more research is 00000012735247422049454 00006c77
needed in understanding the switching costs and the open 336313936362d322e310000 74707400
source adoption strategies of enterprises. Another important 00000000000000000000000 0001f0000
area is the interaction between client-side and server-side 00000000000000000000000 00014626
software products and how this interaction affects the 0000 for all and, everything b7074000
competition in the software industry and the success of open else being equal, the relative 00204000
source. investment in the open 00014725
source operating system 8595a000
increases; if it is assumed 00218000
that productivity of 00014675
proprietary software 8595a000
development is higher, the 0022c000
relative investment in the 00014625
proprietary operating system 8595a000
increases.
References
Bitzer, J. and P. Schroder, 2003. Competition and innovation in a technology setting software
duopoly. Discussion Paper 363, DIW Berlin.

Bitzer, J., 2004. Commercial vs. open source software: the role of product heterogeneity in
competition. Economic Systems, 28, 369-381.

Casadesus, R. M. and P. Ghemawat, 2003. Dynamic mixed duopoly: a model motivated by Linux
vs. Windows. Harvard Business School Working Paper.

Comino S. and F. Manenti, 2005. Government policies supporting open source software for the
mass market. Review of Industrial Organization, 26(2), 217.

Economides, N. and Katsamakas, E., 2005. Two-sided competition of proprietary vs. open-source
technology platforms. forthcoming, Management Science.

Franke, N., and E. von Hippel, 2003. Satisfying heterogeneous user needs via innovation toolkits:
the case of Apache security software. Research Policy, 32(7), 1199-1215.

Johnson, J. P., 2002. Open source software: Private provision of a public good. Journal of
Economics & Management Strategy 11(4): 637-662.

Lerner, J. and J. Tirole, 2001. The open source movement: Key research questions. European
Economic Review 45(4-6): 819-826.

Lerner, J. and J. Tirole, 2002. Some simple economics of open source. Journal of Industrial
Economics 50(2): 197-234.
Lerner, J. and J. Tirole, 2004. The economics of technology sharing: open source and beyond.
NBER Working Paper 10956.

Lessig, L., 2001. The future of ideas. Random House.

Mustonen, M., 2003. Copyleft - the economics of Linux and other open source software.
Information Economics and Policy 15(1): 99-121.

Mustonen, M. (2005), “When does a firm support substitute open source programming”
Journal of Economics and Management Strategy 14(1): 121-139.

Raymond, E., 2001. The Cathedral and the Bazaar. O'Reilly Press.

Rossi M., 2004. Decoding the F/OSS software puzzle. Working Paper, Universita di Siena.

Von Hippel, E., 2005. Democratizing Innovation. MIT Press.

 NET Institute*

www.NETinst.org

Working Paper #05-07

October 2005

Linux vs. Windows:

A comparison of application and platform innovation incentives
for open source and proprietary software platforms

Nicholas Economides
Stern School of Business, NYU
and
Evangelos Katsamakas
Fordham University

* The Networks, Electronic Commerce, and Telecommunications (“NET”) Institute,

http://www.NETinst.org, is a non-profit institution devoted to research on network industries,
electronic commerce, telecommunications, the Internet, “virtual networks” comprised of computers
that share the same technical standard or operating system, and on network issues in general.