How Does a Proprietary Software Compete against Free Software?
Abstract: Open source software poses serious challenge to proprietary software vendors. To respond, “lock-in customers and lock-out competitors” seems a viable strategy for proprietary software providers, who attempt to lock in customers by creating substantial switching costs via product design. This paper examines whether such a lock-in strategy will indeed, as commonly believed, benefit proprietary software vendors in the face of competition from not-for-profit open source software. Developing a two-period duopoly model in which customers are heterogeneous in their preferences and willingness-to-pay, we find that the answer could be either way. Lock-in strategy may be counter-productive in competing against open source software. This is in contrast to the competition between two proprietary software providers, whereas lock-in strategy could be beneficial under certain conditions. We find that lock-in reduces social welfare, but certain customers may be better off with lock-in. Final
