Proprietary Software's R&D Decisions When Open Source Software Appears in a Software Industry

In recent years, the problem of open source is a very hot topic in software industries, however the studies about how open source software (OSS) affects competitive strategies of software industry are rare. Though expanding the classical Hotelling model, this paper investigates the product innovation decisions of proprietary software (PS) firm when open source software appears. In this paper, the model includes not only important factors (e.g. the network externality and software compatibility) affecting the traditional software industry competition, but also the OSS learning (maintenance or development) costs and user's software development skills. The following conclusions are found: (i) the compatibility degree between OSS and PS affects R&D decisions of PS; (ii) the R&D effort of PS increases with the learning (maintenance or development) costs of OSS; (iii) how network externality and user's software development skills affect the R&D effort of PS depends on the compatibility degree between OSS and PS.