Product Strategy for Commercial Open Source Software

Commercial open source software (COSS) products – privately developed software based on publicly available code – represent a rapidly growing multi-billion dollar market. A unique aspect of competition between COSS firms is that many use software licenses that require their enhancements to be made publicly available, creating an incentive for some firms to free-ride on others contributions. Despite its success, the COSS industry has received scant attention in the marketing literature. We develop a model of competition between COSS firms that incorporates the particular terms of the software licenses. Our model consists of (1) a vertically differentiated duopoly of software firms where product quality is composed of a mix of features and usability and (2) a developers market where firms hire developers to improve their product quality. Our analysis reveals several counterintuitive findings. First, when developers skills are unobservable to firms, all firms profits and consumer surplus can be higher than when skills are observable. Second, COSS products can be of higher quality than traditional closed source products. Third, when the market is large and signaling is costly, firms can benefit when they are mandated to make their software code public, even when one firm completely free-rides