Open Source - Economic Analysis

Economic Analysis

Most economists agree that open-source candidates have an information good (also termed "knowledge good") aspect. In general, this suggests that the original work involves a great deal of time, money, and effort. However, the cost of reproducing the work is very low, so that additional users may be added at zero or near zero cost – this is referred to as the marginal cost of a product. Copyright creates a monopoly so the price charged to consumers can be significantly higher than the marginal cost of production. This allows the author to recoup the cost of making the original work, without needing to find a single customer that can bear the entire cost. Conventional copyright thus creates access costs for consumers who value the work more than the marginal cost but less than the initial production cost. Access costs also pose problems for authors who wish to create a derivative work - such as a copy of a software program modified to fix a bug or add a feature, or a remix of a song - but are unable or unwilling to pay the copyright holder for the right to do so.

Being organized effectively as a consumers' cooperative, the idea of open source is to eliminate the access costs of the consumer and the creators of derivative works by reducing the restrictions of copyright. Basic economic theory predicts that lower costs would lead to higher consumption and also more frequent creation of derivative works. Additionally some proponents argue that open source also relieves society of the administration and enforcement costs of copyright. Organizations such as Creative Commons have websites where individuals can file for alternative "licenses", or levels of restriction, for their works. These self-made protections free the general society of the costs of policing copyright infringement. Thus, on several fronts, there is an efficiency argument to be made on behalf of open-sourced goods.

However, others argue that because consumers do not pay for the copies, creators are unable to recoup the initial cost of production, and thus have no economic incentive to create in the first place. By this argument, consumers would lose out because some of the goods they would otherwise purchase would not be available at all. In practice, content producers can choose whether to adopt a proprietary license and charge for copies, or an open license. Some goods which require large amounts of professional research and development, such as the pharmaceutical industry (which depends largely on patents, not copyright for intellectual property protection) are almost exclusively proprietary.

Alternative arrangements have also been shown to result in good creation outside of the proprietary model. Examples include:

  • Creation for its own sake - for example, Wikipedia editors add content to satisfy their own curiosity or because they are bored. Artists have a drive to create. Both communities benefit from free starting material.
  • Voluntary after-the-fact donations - used by shareware, street performers, and public broadcasting in the United States.
  • Patron - For example, open access publishing relies on institutional and government funding of research faculty, who also have a professional incentive to publish for reputation and career advancement. Works of the U.S. federal government are automatically released into the public domain.
  • Freemium - Give away a limited version for free and charge for a premium version (perhaps using a dual license)
  • Give away the product and charge for something related - charge for support of open-source enterprise software, give away music but charge for concert admission
  • Give away work in order to gain market share - used by artists, in corporate software to spoil a dominant competitor (for example in the browser wars and the Android operating system)
  • For own use - Businesses or individual software developers often create software to solve a problem, bearing the full cost of initial creation. They will then open source the solution, and benefit from the improvements others make for their own needs. Communalizing the maintenance burden distributes the cost across more users; free riders can also benefit without undermining the creation process.
Further information: Business models for open-source software

Read more about this topic:  Open Source

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