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A brief look of the economics of open source software

The open source software-development model gives free access to a software’s source code, allowing further users to modify and extend the program. This column argues that the success of Wikipedia and other users of open source methods show that it is likely to continue to be a cornerstone of the digital economy.

The open source model is a form of software development in which the source code is made available, free of charge, to all interested parties; further users have the right to modify and extend the program.Open source software methods rely on developers who reveal the source code under an open source licence. Under certain types of open source licences, any further development using the source code must also be publicly disclosed.

The open source model has become quite popular and is often referred to as a movement with an ideology and enthusiastic supporters. (See for example Stallman 1999 and Raymond 2000). At the core of this process are two interesting phenomena:

  • Unpaid volunteers do a non-trivial portion of the development of open source programs and,
  • Unlike commercial software, open source software is not sold or licensed for a fee.

In this column, we discuss issues and trends in open source software development that we consider to be most important. (For further reading, several books provide detailed examinations of the open source software phenomenon. See Dibona et al 1999 and 2006, Lerner and Schankerman 2010, and also Fershtman and Gandal 2011a, on which this column is largely based.)

The motivation of programmers

Having unpaid volunteers is puzzling for economists. What are the incentives that drive developers to invest time and effort in developing these open source programs? There are several possible explanations:

  1. Lerner and Tirole (2002) argue that developers of open source programs acquire a reputation, which is eventually rewarded in the job market.
  2. Harhoff et al (2003) write that end users of open source benefit by sharing their innovations.
  3. Hars and Ou (2001) and Hertel et al (2003) find (using survey methods) that peer recognition and identification with the goals of the project are the main motivations for developers who contribute to open source software projects.
Licencing of open source software

Like other products based on intellectual property, the intellectual property in software is typically ‘licensed’ for use, not sold outright. This is the case regardless of whether the software is proprietary or open source. Even though open source software is distributed freely without payment, the programs are distributed under licencing agreements. There are several different types of open source licences. The main difference is the degree of restrictions they entail. Reciprocal (or viral) licences require that modifications to the program also be licensed under the same licence as the original work. An example is the GNU General Public License (GPL), which is the most popular open source licence. If a software program is distributed under a GPL, the source code must be made available to users. Additionally, programs that incorporate code from a software project employing a GPL also must ensure that the source code is available. The GPL is, hence, a very restrictive licence and it is difficult to develop commercial products under this licence. More permissive licences enable redistribution under a small set of rules. Under these licences, the software can be modified without making the new source code available publicly as long as the proper attribution is given.

Several papers in the literature have empirically examined the effect of different licences. Bonaccorsi and Rossi (2002) survey Italian firms that use open source software and found that, on average, firms that employ software with restrictive licences supply fewer proprietary products than firms that employ software with less restrictive licences. Lerner and Tirole (2005) examine the choice of licences using the database of open source projects from the SourceForge web site. They find that open source projects that run on commercial operating systems and projects that are designed for developers tend to use less restrictive licences, while projects that are targeted for end users tend to use more restrictive licences. Using the same database, Fershtman and Gandal (2007) find that output per developer is much higher in OSS projects with less restrictive licences.

Changes in the open source model – firm participation

Increased firm participation in open source projects. The degree of reliance on unpaid programmers has changed over time. More of the work on open source projects is now done by contributors who work for firms. Employing a sample of 100 open source projects hosted at Sourceforge.com, Lerner et al (2006) find that the share of corporate contributors is higher in larger open source projects, where large means more lines of code. Additionally, the institutional setting in which open source takes place has also evolved over time. Sourceforge, which hosts many open source projects (more than 240,000 projects and 2.6 million registered users as of August 2010) is not the only setting in which open source occurs. Sourceforge is probably an ideal platform when an open source project lacks an institutional home. But there are many important cases in which open source projects are hosted within an institutional setting. Linux operates within a consortium supported by many firms – and senior personnel receive salaries from the organisation. In other cases, firms sponsor open source projects – Webkit, which received financing from Apple, is an example.

Open source and proprietary software in the same market. Several open source products have had great commercial success. Indeed, in most software markets, open source and proprietary products compete side by side. In many of these markets, open source products have a non-trivial market share as the following examples show:

  • Web browsers: According to W3Counter, in September 2009, Firefox (which is an open source software program) had 32% of the web browser market.1
  • Web servers: Apache (which is an open source software program) has been the dominant firm in this market for many years. As of September 2009, Apache served approximately 55% of all websites.2

Towards mixed-source strategies. A key change over time in the open source model is that many proprietary firms now initiate open source projects themselves, in addition to supplying programmers. Indeed, many proprietary firms now use a mixed-source model, that is, a model in which some of their products are proprietary and are distributed under traditional licences, while some of their products are open source and distributed under an open source licence. Such a mixed-source strategy enables firms to benefit from the advantages of both open source and proprietary development. One key advantage to open source software development is that because the code is developed in the public domain, problems (bugs) will be found and solved quickly. In a huge survey of more than 2,300 companies in 15 countries, Lerner and Schankerman (2010) found that more than 25% of all firms surveyed develop both open source and proprietary software programs.

Open source software and incentives for R&D

Open source development leads to very different incentives for R&D development than the traditional proprietary development model (see Maurer and Scotchmer 2006 for a detailed analysis). Additionally, open source development also has implications for the cost of R&D in that open source development can be thought of as ‘pooled’ R&D. Firms share code to test software, fix bugs, and make improvements. This typically implies cost savings – see West and Gallagher (2006) and Rossi and Bonaccorsi (2005). Without open source, they would have to do this independently, which would imply duplicated costs.

Empirical research on open source software and R&D is at a nascent stage. Using the data at SourceForge, we find empirical support for the existence of knowledge spillovers among open source projects (Fershtman and Gandal 2011b). Our paper shows that the structure of the project network is associated with project success and suggests the existence of both direct and indirect project knowledge spillovers.

Open source more broadly defined – Digital content

Open source has spread well beyond the software development.3 Digital content is one area where open source has made a major impacts; Creative Commons is one of the most important outgrowths of open source. Creative Commons developed a way to help creators of content grant various degrees of copyright permissions to their work. The licences of Creative Commons enable content creators to choose a range of copyright protection, from "all rights reserved" (full protection) to “some rights reserved,” to "no rights preserved". Several key institutions use these licences. Wikipedia, the incredibly successful online encyclopaedia, started with a variant of a GPL licence for text, and then adopted Creative Commons methodology. Some YouTube and Flickr users share their content using Creative Commons licences. The success of Wikipedia and other digital content providers using open source methodology shows that the open source model continues to evolve and will likely continue to be an important part of the digital economy.

Editor's Note: This article draws heavily from Fershtman, Chaim and Neil Gandal, "A Brief Survey of the Economics of Open Source Software," The New Palgrave Dictionary of Economics, Palgrave Macmillan, reproduced with permission of Palgrave Macmillan. The definitive published version of this extract may be found in the complete New Palgrave Dictionary of Economics in print and online, available at http://www.dictionaryofeconomics.com.


Bonaccorsi, A and C Rossi (2002), “Licencsing Schemes in the Production and Distribution of Open Source Software: An Empirical Investigation” available at http://opensource.mit.edu/papers/billionaccorsirossilicense.pdf.

DiBona, Chris, Sam Ockman, Mark Stone (1999), Open Sources: Voices from the Revolution, O’Reilly Media Inc.

DiBona, Chris, Danese Cooper, Mark Stone (2006), Open Sources 2.0: The Continuing Revolution, O’Reilly Media Inc.

Fershtman, C, and N Gandal (2007), “Open Source Software: Motivation and Restrictive Licencsing”, International Economics and Economic Policy, 4:209-225

Fershtman, C and N Gandal (2011a), " A Brief Survey of the Economics of Open Source Software", in L Blume and S Durlauf (eds.), The New Palgrave Dictionary of Economics, Palgrave Macmillan.

Fershtman, C and N Gandal (2011b), "Direct and Indirect Knowledge Spillovers: The 'Social Network' of Open Source Projects", RAND Journal of Economics, 42:70-91.

Harhoff, D, J Henkel, and E von Hippel (2003), “Profiting from voluntary spillovers: How users benefit by freely revealing their innovations”, Research Policy, 32:1753-1769.

Hars, A, and S Ou (2001), “Working for free? - Motivations for participating in open source projects”, International Journal of Electronic Commerce, 6:25-39.

Hertel, G, S Niedner, and S Herrmann (2003), “Motivation of software developers in open source projects: An internet-based survey of contributors to the Linux kernel”, Research Policy, 32:1159-1177.

Lerner, J, P Parag, and J Tirole (2006), "The Dynamics of Open-Source Contributors", American Economic Review Papers and Proceedings, 96:114-18.

Lerner, J, and M Schankerman (2010), The Comingled Code: Open Source and Economic Development, MIT Press.

Lerner, J and J Tirole (2002), "Some Simple Economics of Open Source", Journal of Industrial Economics, 52:197-234.

Lerner, J and J Tirole (2005), "The Scope of Open Source Licencsing", Journal of Law, Economics, and Organization, 21:20-56.

Maurer, S and S Scotchmer (2006), "Open Source Software: The New Intellectual Property Paradigm", Economics and Information Systems, 285-322.

Raymond, E (2000), “The Cathedral and the Bazaar".

Rossi, C and A Bonaccorsi (2005), “Intrinsic vs. Extrinsic Incentives in Profit-Oriented Firms Supplying Open Source Products and Services”, First Monday, 10(5).

Stallman, R (1999), “The GNU Operating system and the Free Software Movement”, in C Dibona, S Ockman, and M Stone (eds.), Open Sources: Voices from the Open Source Movement, O’Reilly.

West, J and S Gallagher (2004), “Challenges of Open Innovation: The Paradox of Firm Investment in Open Source Software”, R&D.

1 The market data are from W3Counter and are from October 2009. See http://www.w3counter.com/globalstats.php, accessed 3 November 2009.

2 See http://en.wikipedia.org/wiki/Apache_HTTP_Server, accessed 3 November 2009.

3 This section draws heavily from comments and suggestions made by Shane Greenstein.

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