Dual licensing strategy with open source competition

Description

Software firms that produce and sell proprietary software can use dual licensing (DL) strategies,that is, they can distribute their products under different (proprietary, OS, e.g., open source)licensing terms. We investigate the relevance and impacts of such distribution strategies in thepresence of an OS software competitor. We determine the conditions for this strategy to be profitablefor the software firm, and its impact on price, market share, and welfare. We show that aDL strategy can be used to crowd the OS software out of the market. This strategy then is profitablefor the software firm only if the spillovers coming from the hybrid software (i.e., second distributionlaunched by the software firm) are sufficiently high and result in both a higher price anda lower market share for the proprietary software. We also consider a situation where the introductionof DL leads to a market shared between the firm's software and the OS competitor. Inthis situation, the profitability of the DL strategy depends also on the degree of compatibilitybetween the proprietary software and its OS competitor. We show also that this situation cangenerate conflicts of interests between proprietary software vendors and users, resulting in suboptimaloutcomes.

Abstract

International audience

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