Pricing Open Source Software
by Byung Cho KIM

Abstract

As some open source software products become popular and their market shares approach critical mass, the vendors of such software seek to capitalize on publicity and popularity of their products. In this paper, we explore the issue of pricing for-profit open source software. Two approaches have been successful in commercializing open source software: the dual-licensing model and the support model. We study the optimal pricing strategy for open source software, investigating whether the open source software pricing models are viable under monopoly and duopoly. Our model considers the motivation for and the barrier to open source software adoption, which provides a better picture of the open source software market. We identify the factors that affect the optimal pricing strategy of the open source software vendors. We study competition between commercial and open source software, motivated by what happens in the real-world database and operating systems markets. By setting up a two-period game, we study the role of switching cost that customers face when they switch from established commercial software to open source software. We find that neither the dual-licensing nor the support model is profitable in the presence of large switching cost. When the switching cost is lower than a certain threshold, software vendors split the market in the second period in a way that the open source software vendor serves technology savvy customers and the commercial software vendor covers the segment of the remaining customers. Interestingly, we find that an open source software vendor with the support model may dominate the market in the second period when the vendor independence benefit exceeds switching cost. The results can give pricing guidelines to the open source software vendors in the case of monopoly and duopoly, which is not clear in the current state.

About the speaker

Byung Cho Kim is a PhD candidate of Information Systems at the Tepper School of Business, Carnegie Mellon University. He received M.S. in Information Systems from Carnegie Mellon University (2004), M.S. in Statistics from the University of Chicago (2002), and B.S. in Mathematics from Sogang University in Korea (2000). His research interests include economics of information security, open source software, information goods pricing, and business value of IT. His research papers have been presented at conferences, such as International Conference in Information Systems (ICIS) in 2005 and 2006, Workshop on the Economics of Information Security (WEIS) in 2005, and Workshop on Information Systems and Economics (WISE) in 2003 and 2004. His research, “Software Product Risks and Liabilities” has been supported by CyLab since 2006.