The Economics of Technology Sharing

In this post I will try to answer the question why programmers invest their own time in OS projects? What motivates them to contribute and what is in it for commercial companies?

Literature provides us with 6 possible reasons:

• Improve performance in paid work (e.g. system administrators looking for solutions for their companies) 
• Intrinsic pleasure (e.g. cool project) 
• Future job offers, shares in commercial open source based companies 
• Ego gratification from peer recognition 
• The promise of higher future earnings 
• Intellectual curiosity 

Signaling 

Other very important reason for investing programmers’ time in open source projects is signaling, i.e. proving high level of competence. Why this is important in OS? Because the ability to signal a high level of competence can be higher in an OS project. 

• Outsiders can see the contribution of each individual 
• The programmer takes full responsibility for a subproject 
• More knowledge can be transferred to new environments, because many elements of the source code shared across OS projects 

Let’s have a look at the Apache Project.

Instead of central leader they have a series of committees to resolve open issues. There are five levels of rank within the Apache Software Foundation (ASF): 

• Developer 
• Committer 
• Project management committee member 
• ASF member 
• ASF board member 

Advancement is made in recognition of an individual’s commitment and contribution to an Apache project. Empirical study (Hann et al 2004) showed that: 

• Sheer volume of contribution have little impact on salary 
• Moving into higher rank resulted in 14-29% increase 

Commercial Firms

Commercial firms may interact with open source projects in a number of ways:

• Benefit from complementary markets 
• Benefit from learning 
• Benefit from good public relations 
• Compete directly with open source providers 

Example: IBM and HP released codes to open source communities

Why?

Bait and hook: if the released code will be used more widely, profits in the complementary segment will grow (e.g. from consulting services)

Other very important reason is that many small developers are uncomfortable doing business with large firms, that may compete in the developers segment and reduce price in order to raise demand for the broad software platform.

By contrast, when a large firm makes its platform available on an open source basis, the small firm need no longer fear being squeezed.

However, we don’t know if the corporation will keep all source code in the public domain? Or if it will highlight important contributions adequately?

In this case important licensing plays important role.

Open source licenses

Permissive license

users retain the ability to use the code as they want. Common in projects with strong appeal to the community of contributors

Restrictive license 

common in projects geared for end users who are unlikely to appreciate the coding (e.g. computer games)

Quality

There is no consensus if open source software is superior to “off-the-shelf” commercial software. Advocates of OS code’s higher quality stress that:

• Users can enhance quality 
• Users can customize it to meet particular needs 
• There is a superior development process: 
• Workers in commercial firms may not report errors of fellow employees – however OS programmers do not have incentive to collude, and their project is more peer reviewed 
• Security flaws are more easily identified because many people are involved 

Counter arguments:

• The openness of the code allows hackers to figure out its weaknesses 
• Poorer documentation (due to the incentives structure) 
• Poorer user interface 

Public policy

Governments around the world encourage the development and use of open source projects. However, the impact on social welfare is not conclusive:

• OS projects have access to a larger talent pool 
• On the other hand: free riding problem 

According to static point of view, any potential user has access therefore OS increase social welfare.

Dynamic view states that developers may lack incentives to introduce new products therefore OS reduce social welfare.

Bibliography: Lerner, Josh, and Jean Tirole. The economics of technology sharing: Open source and beyond. No. w10956. National Bureau of Economic Research, 2004.