Open Source Development with a Commercial Complementary Product or Service

Abstract:  We examine optimal control decisions regarding pricing, network size and hiring strategy in the context of open source software development. Opening the source code to a software product often implies that consumers would not pay for the software product itself. However, revenues may be generated from complementary products. A software firm may be willing to open the source code to
its software if it stands to build a network for its complementary products. The rapid network growth is doubly crucial in open source development, where the users of the firm's products are also contributors of code that translates to future quality improvements. To determine whether or not to open the source, a software firm must jointly optimize prices for its various products while simultaneously managing its product quality, network size, and employment strategy. Whether or not potential gains in product quality, network size, and labor savings are sufficient to justify opening the source code depends on product and demand characteristics of both the software and the complementary product as well as on the cost and productivity of in-house developers relative to open source contributors. This paper investigates these crucial elements to allow firms to reach the optimal decision in
choosing between the open and closed source models.