Competition between Open Source and Proprietary Software, and the Scope for Public Policy

Open source software (OSS) has become a remarkable competitor of traditional, proprietary software in many markets. This has led advocates of OSS to demand public policy interventions in favor of OSS. The main argument is that OSS mitigates market failures associated with typical features of software markets: economies of scale, direct network effects, switching costs, and systems competition. We study the impact of several policy instruments on social welfare in a duopoly model which incorporates all of the aforementioned features of software markets. Overall, we do not find much support for interventions in favor of OSS. However, systems competition may lead to a situation in which the subsidization of OSS complements increases welfare.