Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, November 23, 2010

Economics of Open Source: A Dynamic Approach

Posted by D. Daniel Sokol

Jeongmeen Suh (KIEP) and Murat Yilmaz (Bogaziçi University) describe the Economics of Open Source: A Dynamic Approach.

ABSTRACT: This paper analyzes open innovation projects and their e¤ects on incentives for innova- tion. We model basic features of the General Public License (GPL), one of the most popular open source licenses and study how firms behave under this license. Under the GPL, there is a trade-off between stimulating innovation and promoting disclosure. By using the open source, a firm can increase its technology level and therefore its probability of innovation success and of achieving a greater profit in that period. However, any innovative findings using open source would be also open source in subsequent periods. This obligation decreases the expected future revenue of the firm. We analyze this trade-off and show that if a firm has the same technology level as the open source, it does not use the source. On the other hand, if a firm has a lower level of production technology than the open source, it is optimal to use the source.

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