Open Source Development in a Differentiated Duopoly

Open source software is released under an open source license giv-ing individuals the right to use, modify, and redistribute freely the programs. This paper proposes a model of differentiated duopoly in which firms invest in the development of proprietary or open source software. The main findings are: (i) firms invest more when the prod-ucts are substitutes; (ii) for substitute products, firms ’ investment in software development is greatest when the software is open source; (iii) for close to perfect complements, firms ’ investment in software development is greatest when the software is proprietary; and (iv) for substitute products, investment in open source software yields higher profits than investment in proprietary software