von Engelhardt, Freytag, Maurer: "Open vs closed source software: The quest for balance"

[Alexander Terekhov]

Interesting article.

http://www.voxeu.org/index.php?q=node/5725

"Open vs closed source software: The quest for balance

Sebastian v. Engelhardt   Andreas Freytag   Stephen M Maurer

29 October 2010

Governments are increasingly interested in promoting open source
software. Yet policymakers have seldom laid out any clear theoretical or
empirical justification for these policies. This column explores recent
studies suggesting that open source and proprietary software strengthen
each other and should co-exist – too much open source could actually be
a bad thing.

Open source software (OSS) like the operating system Linux is marked by
free access to shared source code that is developed in a public,
collaborative manner. While most of this activity was originally
non-commercial, over the past decade companies have been asking
themselves whether similar OSS methods can be made to earn a profit.
This has led to an explosion of OSS-based business models and
investments throughout the information and communications technologies
sector (Ghosh et al. 2002, Dahlander and Magnusson 2005, Lerner et al.
2006).

Governments are similarly intrigued and have begun experimenting with
various pro-OSS measures including procurement preferences, tax breaks,
and grants (Lerner and Tirole 2005, CSIS 2008). At first, the implicit
policy assumption seemed to be that OSS was inherently more efficient
than proprietary, or “closed source”, software (CSS)1. This argued for
almost any policy that promised to increase the amount of OSS. More
recently, however, some politicians have begun to argue that society
needs a “balance” of CSS and OSS firms (CSIS 2008). But how can
policymakers recognise the right “balance”? Pro-OSS interventions make
very little sense if there are too many OSS firms already.

The threshold question

The threshold question, of course, is whether governments can influence
OSS at all. Ten years ago, most scholars were pessimistic. This was
sensible in an era when OSS was driven by non-commercial incentives like
altruism, reputation, and signalling. How do you influence a “movement”
dominated by college students? (Schmidt and Schnitzer 2003).

Since then, however, things have changed dramatically. Deshpande and
Riehle (2008) report that the OSS sector grew from about 500 projects in
2001 to 4,500 in 2007. Furthermore, this growth was dominated by
business models in which companies contribute to a shared code base in
hopes of increasing consumer demand for some related product (e.g.
hardware, software) or service. This for-profit outlook is clearly
responsive to government’s traditional tax-and-spend policy levers.

Western governments, then, should have little difficulty influencing OSS
development. Governments in the developing world will, as usual, face
bigger challenges. von Engelhardt and Freytag (2010) study differences
in OSS activities across 70 countries. They find that the main
predictors of OSS activity are generalised cultural factors like
interpersonal trust, favourable attitudes toward scientific progress,
and a culture of self-determination/individualism. No government can
supply these preconditions overnight. More encouragingly, there is some
evidence that strong intellectual property rights and/or deregulated
markets promote OSS. Developing world governments will presumably find
such interventions easier to manage.

Getting the right mix

But having power is only half the analysis. How, if at all, should
governments use it? One important theoretical insight starts from the
observation that OSS and CSS are both imperfect tools, each of which has
distinct areas of advantage and disadvantage (von Engelhardt 2008). This
implies that large modern economies will usually require a mix of both
methods.

Furthermore, von Engelhardt and Maurer (2010) provide an important clue
to choosing this mix. They point out that the existence of CSS code
increases OSS output and vice versa. To see why, consider an all-OSS
world in which each company offers consumers exactly the same shared
code as every other company. By definition no company can then compete
by writing more OSS code than its rivals. This lack of competition
suppresses code production for the same reason that cartels suppress
output. 

Conversely, a wide range of generic models predict that software
production should peak when roughly 15% to 20% of all companies adopt
OSS methods.

Without specific evidence to the contrary, this suggests that
competition policy should not normally challenge OSS collaborations
whose members comprise less than about 20% of the market. (Larger
collaborations may also be acceptable and would have to be examined on a
case-by-case basis). In the US, authorities have long applied a similar
"Five Effort" rule to joint R&D ventures. This, then, is the “balance”
that politicians speak of.

That would be the end of the story if we could rely on markets to
deliver the right mix of OSS and CSS firms. However, there are at least
two reasons to doubt this.

First, there are many cases in which would-be OSS companies cannot
profitably enter all-CSS industries and vice versa. For this reason, we
expect a significant number of pure-state industries to become “locked
in” indefinitely.

Second, consider markets where OSS and CSS business models co-exist. We
have already pointed out that OSS operates as a de facto cartel. This
will normally make OSS firms more profitable than an equivalent number
of CSS firms. As a result, we expect most markets to host far more OSS
firms than policymakers would like.

How should governments intervene?

One obvious solution is to promote OSS (or CSS) development in markets
that appear to be “locked in,” i.e. have remained CSS (or OSS) for a
long time. These interventions will have to be made on a case-by-case
basis. Much more general policies will be needed to adjust the number of
OSS firms in mixed markets. Detailed analysis suggests that the best
solution would be to tax OSS firms and use the funds to provide tax
breaks for CSS firms. Of course, we recognise that OSS’s altruistic
image may make such policies politically unrealistic. This, however,
could easily change as the public learns to associate OSS with companies
like IBM, Sony Ericsson, and LG. In the meantime, our analysis suggests
that current proposals advocating pro-OSS procurement preferences are
poorly motivated and should be viewed with suspicion.

In theory, government can also intervene by purchasing more OSS output
than the private sector is willing to fund. Theory suggests that this
may often improve welfare. That said, direct funding of OSS production
would yield a host of familiar problems.

First, policymakers seldom, if ever, know which projects are likely to
deliver the most social benefit per euro invested.

Historically, this has notoriously persuaded governments to invest in
projects with little or no value.

Second, government investment inevitably breeds lobbying expenditures
that offer little or no value to society.

On the other hand, the argument that government investment has been
mishandled in the past is not definitive. The economics literature is
filled with clever “mechanism design” papers that explain how government
investment can be made to track private sector judgements about which
projects do (and do not) offer value. Probably the most straightforward
scheme would be for government to withhold funds unless and until
companies made matching investments (Maurer and Scotchmer 2004).

Concluding remarks

Twenty years on, the OSS revolution is stronger than ever. In the
meantime, scholars have learned a great deal about this new production
method. Governments need to be aware of these insights.

References

Benkler, Y (2002), “Coase’s penguin, or, Linux and the nature of the
?rm”, Yale Law Journal, 112(3):369-437.

CSIS (2008), “Government open source policies”, Centre for Strategic and
International Studies.

Dahlander, L and MG Magnusson (2005), “Relationships between open source
software companies and communities: Observations from nordic ?rms”,
Research Policy 34(4):481-493.

Deshpande, A and D Riehle (2008), “The total growth of open source”, in
B Russo, E Damiani, S Hissam, B Lundell, and G Succi (eds.), Open Source
Development, Communities and Quality, Vol. 275 of IFIP International
Federation for Information Processing, Springer, 197-209.

von Engelhardt, S and A Freytag (2010), “Institutions, culture, and open
source”, Jena Economic Research Papers 2010-010,
Friedrich-Schiller-University Jena and Max-Planck-Institute of
Economics.

von Engelhardt, S, SM Maurer (2010), “The new (commercial) open source:
Does it really improve social welfare?”, Berkeley Goldman School of
Public Policy Working Paper 10-001.

von Engelhardt, S (2008), “Intellectual property rights and ex-post
transaction costs: the case of open and closed source software”, Jena
Economic Research Papers 2008-047, Friedrich-Schiller-University Jena
and Max-Planck-Institute of Economics.

Ghosh, RA, R Glott, B Krieger, and G Robles (2002), “FLOSS ?nal report,
part 3: Basics of open source software markets and business models”,
International Institute of Infonomics, University of Maastricht.

Lerner, J and J Tirole (2005), “The economics of technology sharing:
Open source and beyond”, Journal of Economic Perspectives, 19(2):99-120.

Lerner, J, PA Pathak, and J Tirole (2006), “The dynamics of open-source
contributors”, American Economic Review, 96(2):114-118.

Lessig, L (1999), Code and Other Laws Of Cyberspace, Basic Books.

Lessig, L. (2006), Code: Version 2.0, Basic Books.

Maurer S and S Scotchmer (2004), “Procuring Knowledge”, in G Libecap
(ed.), Advances in the Study of Entrepreneurship, Innovation and Growth:
Vol. 15, JAI Press.

Schmidt, KM and M Schnitzer (2003), “Public subsidies for open source?
Some economic policy issues of the software market”, Harvard Journal of
Law & Technology, 16(2):473-505.
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1 Such a view is to some extend based on arguments by e.g. Benkler
(2002) and Lessig (1999, 2006)

This article may be reproduced with appropriate attribution. See
Copyright (below). "
 
regards,
alexander.

"Plaintiff Erik Andersen is a work-from-home father who has gifted 
to the world software underlying a significant body of consumer
electronics." ROFL
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