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Research Note ---Lock-In Strategy in Software Competition: Open-Source Software vs. Proprietary Software

Author

Listed:
  • Kevin Xiaoguo Zhu

    (The Rady School of Management, University of California, San Diego, La Jolla, California 92093)

  • Zach Zhizhong Zhou

    (The Rady School of Management, University of California, San Diego, La Jolla, California 92093)

Abstract
Open-source software poses a serious challenge to proprietary software vendors. “Lock in customers” seems a tempting strategy for proprietary software vendors, who attempt to lock in customers by creating switching costs. This paper examines whether such a lock-in strategy will indeed benefit proprietary software vendors facing competition from open-source software, who can credibly commit future prices. Developing a two-period duopoly model in which software products are differentiated and customers are heterogeneous, we find that the lock-in strategy is actually counterproductive in competing against open-source software. In fact, giving customers the freedom of choice may end up benefiting the proprietary software vendor. In terms of the broader effect, we find that lock-in reduces overall social welfare, but certain customers may actually be better off with it. Finally, we show that the lock-in strategy works differently for different types of customers in the software market (i.e., foresighted versus myopic customers). This suggests that customer behavior could significantly alter the equilibrium strategy of software vendors.

Suggested Citation

  • Kevin Xiaoguo Zhu & Zach Zhizhong Zhou, 2012. "Research Note ---Lock-In Strategy in Software Competition: Open-Source Software vs. Proprietary Software," Information Systems Research, INFORMS, vol. 23(2), pages 536-545, June.
    • Handle: RePEc:inm:orisre:v:23:y:2012:i:2:p:536-545
    DOI: 10.1287/isre.1110.0358
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    References listed on IDEAS

    as
    1. Josh Lerner & Jean Tirole, 2002. "Some Simple Economics of Open Source," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 197-234, June.
    2. repec:bla:jindec:v:49:y:2001:i:3:p:281-98 is not listed on IDEAS
    3. Nicholas Economides & Evangelos Katsamakas, 2006. "Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry," Management Science, INFORMS, vol. 52(7), pages 1057-1071, July.
    4. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Terrence August & Hyoduk Shin & Tunay I. Tunca, 2013. "Licensing and Competition for Services in Open Source Software," Information Systems Research, INFORMS, vol. 24(4), pages 1068-1086, December.
    2. Xing Gao, 2020. "Open Source or Closed Source? A Competitive Analysis with Software Security," Decision Analysis, INFORMS, vol. 17(1), pages 56-73, March.
    3. Biondo, A.E. & Pluchino, A. & Zanola, R., 2024. "Simulating the emergence of superstar firms: The role of luck vs talent," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 644(C).
    4. Shaikh, Maha & Levina, Natalia, 2019. "Selecting an open innovation community as an alliance partner: Looking for healthy communities and ecosystems," Research Policy, Elsevier, vol. 48(8), pages 1-1.
    5. Jia, Kunhao & Liao, Xiuwu & Feng, Juan, 2018. "Selling or leasing? Dynamic pricing of software with upgrades," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1044-1061.
    6. Guo, Liang & Wei, Yinghong Susan & Sharma, Ruchi & Rong, Ke, 2017. "Investigating e-business models’ value retention for start-ups: The moderating role of venture capital investment intensity," International Journal of Production Economics, Elsevier, vol. 186(C), pages 33-45.

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