This paper asks when firms and consumers are better off using open source software.
Economics explains why some firms are best off using open source software and others are better off with pre-packaged software. Open source software and traditional software can co-exist.
Free and open source software (FOSS) lets users change code to suit their own needs; open source code under the General Public License (GPL) must be distributed free.
Economists hold that everyone is better off if goods, even information goods like software, are supplied by markets using property or contracts.
Software is complex due to numerous features and interactivity, making development contracts for special software hard to write; ownership might not give the right motivations.
Three mechanisms supply software to firms:
Prepackaged software makes sense unless customers need complexity that a dominant firm finds it too costly to supply.
Application Program Interfaces (APIs) let some customers write their own programs.
FOSS. Once a FOSS project has a base as complex as pre-packaged software, it makes sense to add features with FOSS.
Open source and proprietary software can co-exist, with pre-packaged software serving customers with less need for complexity and FOSS serving those with more.