Two-sided competition of proprietary vs. open source technology platforms and the implicati.pdf

Two-sided competition of proprietary vs. open source technology platforms and the implicati.pdf

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Two-sided competition of proprietary vs. open source technology platforms and the implicati

Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry1 Nicholas Economides2 and Evangelos Katsamakas3 Key words: networks, network effects, network externalities, complements, technology platforms, software industry structure, open source software Introduction Technology platforms are the hubs of the value chains in technology industries. Some examples of technology platforms are Microsoft Windows (PC operating systems), Intel processors (PC hardware), the Palm operating system (handheld devices), and the Sony PlayStation (game consoles). The firm that becomes a platform leader and controls a platform, such as Microsoft in the PC operating systems market, can maintain a strong position in the industry but also faces the challenge of managing the evolution of the platform.4 A firm that controls a platform makes strategic decisions, such as on pricing and technical compatibility, for the products it sells directly to end users as well as with respect to products sold by other firms that are complementary to its platform. We call this “two-sided platform pricing.” For example, firms that control game consoles set a price for the game console and often charge royalties to developers of games, following a two-sided pricing strategy. In another example, Microsoft effectively subsidizes application developers by including in Windows functions that are useful to application developers and not directly useful to end-users. We will focus on the ability of the platform firm to use pricing strategically so as to influence the complementary goods markets. This has not been sufficiently analyzed in the earlier networks literature. Sometimes a technology platform is not proprietary. For example Linux, an emerging operating system, is open-source. In this paper, we also analyze the strategic differences between proprietary and open source technology platforms, and characterize the i

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