The Bloj

The Economics of Open Source

Posted on February 24th, 2006 by Chris.
Categories: Chris, General/Misc..

Prerequisites: An understanding of the fundamentals of economics

Update: Gas is correct to say I’m referring to Free Open Source Software (FOSS), and not open source in its entirety.

Open source software has a unique set of economic rules to follow. Interestingly, it appears to go against the basic idea that people create software for profit; without this incentive it might appear that no one would want to produce software. While this has some obvious truth to it, there are some economic principles at work behind open source. While I could reexplain them in depth, there are already a number of articles on the economics of open source, so I’ll only include a short summary.

How does open source make sense?

Let’s say there was a commodity that was easier to produce the more you made of it. For example, if you were a water company, you’d need to produce pipes to deliver the water everywhere. But once you build the pipes, the cost of delivering the water would be minimal in comparison.

If we assume that this is the case (removing all the special exceptions), then it would only be natural for one company to produce all the water, because it would be cheapest for them to use one network of pipes instead of having plenty of people build the same set of pipes to deliver water over and over again. In economics this is known as a natural monopoly, where it is most efficient for one company to produce all the software. Since the one company is the only source, however, it can make more profits than a typical company can in a competitive market.

Part of the reason some say Microsoft is able to have a monopoly in operating systems (or, at the very least, control a majority of the market) is because it is natural due to network effects. As more and more people use Microsoft Windows, it becomes more and more valuable, because people who write software will make their software usable with Microsoft’s operating system. This means that customers will have a wider choice of software if they use Windows, and they’ll be more likely to buy it, resulting in a positive cycle for Microsoft (and Microsoft shareholders). In addition, the cost of producing an extra copy of software is extremely low.

Open source software takes advantage of this natural monopoly to make software a public commons. When a programmer writes a program, it is almost costless to produce another copy of that software–no factories or plants are needed at all for internet distribution. As a result, it is cheaper for everyone to work on the same open source project than to develop their own proprietary projects, because they can take advantage of the work that has been already put in.

How do these principles extend beyond software?

One might ask, if you can take a natural monopoly in operating systems and turn it into open source, is it possible to have the same common ownership of other natural monopolies?

It doesn’t seem possible to turn water into an open source project, for example. Let’s look at the conditions around the open sourcing of software:

• All the contributors are building around a common framework.
• Each contributor can directly benefit from their own work.
• The cost of providing that benefit to others is minimal.

It’s hard to say what might be able to follow a similar framework. Storytelling? Song writing? The open source framework should, hypothetically, be applicable in the case of a natural monopoly. However, there is one major problem: In most cases, natural monopolies revolve around physical products. The problem is that multiple people can’t usually own a factory or plant (unless we talk about government ownership, which does occur in certain cases). So unless we can reduce those costs or change production to a non-centralized system, it’s impossible to apply the open source system unless the property is purely virtual (intellectual).

Intellectual property in the form of knowledge is already open source (in the form of Wikipedia); is there any other form of knowledge we can distribute?

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