OPENING THE SOURCE CODE: THE THREAT OF FORKING

Abstract

Making software open source can have substantial positive effects on the quality and diffusion of a software and strengthen the sales of complementary products. However, it is a large concern of firms that a competitor might use the very same source code to start its own competitive project, a so-called fork. This paper analyzes whether the threat of forking prevents a firm to open its source code. We consider three different regimes: In the first regime a firm develops and sells software under a proprietary license, in the second regime, it uses an open source business model. The third regime is characterized by the competition of two related open source projects. The switching times between the regimes are optimally determined. We find that the optimal strategy substantially depends on the initial state value and the extent to which a competitor can make use of the firm's software quality. A small initial software quality can prevent a firm to open the code when it cannot afford competition, only with a competitive advantage open source is attractive then. For a large initial software quality, a firm would never open the code immediately, it would either wait or keep it proprietary forever.