DP3793 Public Subsidies for Open Source? Some Economic Policy Issues of the Software Market

Author(s): Klaus M. Schmidt, Monika Schnitzer
Publication Date: February 2003
Keyword(s): innovation incentives, open source, public goods, public subsidies, software market
JEL(s): H41, O31, O38
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3793

This Paper discusses the economic merits of direct or indirect governmental support for open source projects. Software markets differ from standard textbook markets in three important respects that may give rise to market failures: (i) large economies of scale, (ii) crucially important innovations, (iii) significant network effects and switching costs. We analyse the differences between proprietary software and open source software with respect to these market features and ask whether open source as an alternative to proprietary software can mitigate these problems. Then we discuss the implications of various forms of governmental support for open source.