UC San Diego

In the software industry, commercial open-source software vendors have recognized that providing services to help businesses derive greater value in the implementation of open source–based systems can be a profitable business model. Moreover, society may greatly benefit when software originators choose an open-source development strategy as their products become widely available, readily customizable, and open to community contributions. In this study, we present an economic model to study how software licensing attributes affect a software originator’s decisions, aiming to provide policy makers with insights into how welfare-improving, open-source outcomes can be incentivized. We show that when a competing contributor is apt at reaping the benefits of software development investment, a less restrictive open source license (e.g., Berkeley Software Distribution, or BSD style) can improve welfare. On the other hand, when the originator is better at leveraging investment and service costs are high, a more restrictive license (e.g., General Public License, or GPL style) can be best for social welfare even when a contributor can cost-efficiently develop the software. The online appendix is available at https://doi.org/10.1287/isre.2017.0726 .