Abstract

There is a growing body of literature investigating the strategic interaction between proprietary software vendors (PRVs) and their open source (OS) counterparts. Most prior studies focus on software market where PRVs’ revenue comes mostly from software license. Nevertheless, open source software (OSS) is prominent in software markets where both software license and software service contract (for the purpose of maintenance, technical support, upgrade, etc) constitute some considerable portion of PRVs’ revenue. This paper aims to underline the difference between software characterized by high demand for service and by low demand for service in studying how OSS shapes PRV’s software design strategy. The analysis of an economic model implies a magnetic phenomenon in the design of proprietary software with high demand for service, which is not observed in the design of software with low demand for service. The findings imply that in software markets characterized by high demand for service, when OSS is not very sophisticated PRV could introduce more basic version of their software in response to the growth of the OS counterparts. This implication is found to be very much inline with industry practice.

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