PUBLIC SUBSIDIES FOR OPEN SOURCE SOME strongECONOMIC POLICYstrong ISSUES.pdfVIP

Harvard Journal of Law Technology Volume 16, Number 2 Spring 2003 PUBLIC SUBSIDIES FOR OPEN SOURCE? SOME ECONOMIC POLICY ISSUES OF THE SOFTWARE MARKET † ‡ Klaus M. Schmidt and Monika Schnitzer TABLE OF CONTENTS I. INTRODUCTION 474 II. WHAT IS OPEN SOURCE? 475 III. POTENTIAL FAILURES IN THE SOFTWARE MARKET 477 A. Economies of Scale: Static Efficiency 477 B. Incentives to Innovate: Dynamic Efficiency 479 C. Network Effects and Switching Costs486 1. Network effects 486 2. Switching Costs490 IV. SCOPE FOR GOVERNMENT INTERVENTION AND POSSIBLE DISTORTIONS 493 A. Direct Subsidies for Specific Open-Source Projects 494 B. Adopting Open-Source Software in the Public Sector 496 1. Public Subsidies for OSS with Strong Network Effects497 2. Public Subsidies for OSS when Network Effects Are Weak498 C. Subsidies for Institutions that Coordinate Open- Source Development 499 V. CONCLUSION 499 APPENDIX : A SIMPLE MODEL OF GOVERNMENT ADOPTION OF OSS IN A SOFTWARE MARKET WITH HORIZONTAL PRODUCT DIFFERENTIATION 502 † University of Munich, CEPR and CESifo; Department of Economics, University of Munich, Ludwigstr. 28 (Rgb.), D–80539 Munich, Germany, Tel.: +49–89–2180 2250, e- mail: klaus.schmidt@lrz.uni-muenchen.de. ‡ University of Munich, CEPR and CESifo; Department of Economics, University of Munich, Akademiestr. 1, D–80799 Munich, Germany, Tel.: +49-89-2180 2217, e-mail: schnitzer@lrz.uni-muenchen.de. The authors would like to thank David Evans, Joachim Henkel, Justin Johnson, Bernard Reddy, and participants at the conferenc