Some Simple Economics of Open Source
Josh Lerner and Jean Tirole
Published in The Journal of Industrial Economics, Vol. L, No. 2, June 2002.

In order to bring perspective to the concept of Open Source Software, the following video clip provides an historical timeline of the people, actions and events relating to Open Source as an operating system.


Three factors spur the sharing of code to develop and refine software: 1. the quick dissemination of open source software, 2. the capital investment in open source projects, and 3. the organizational structure of open source development. (p.197-198)

The authors try to outline key economic patterns that influence the open source development of software. (p,199)

The nature of open source software development is one of sharing and cooperation. (p.200)

Three time spans for development of Open Source (OS) were reviewed: (p.200-204)

First Era
1960's to 1980's
-commonplace sharing of code
-accelerated with diffusion of Usenet
-informal network
-problem in 1980 - AT&T enforcing IPR relating to Unix
Second Era
1980's to 1990's
-MIT working on Artificial Intelligence in labs; finding ways to disseminate wide variety of software without cost
-formal licensing procedures developed; developers agreed to make code freely available
-distinguishing shareware from public domain software
Third Era
1990's to present
-onset of internet use and access accelerates open source activity - Linux begun
-interactions between open source and commercial companies became commonplace
-alternative approaches to licensing developed cooperatively
-development of Open Source Definition
-new challenges develop - forking; development for high end users; less emphasis on documentation and support as well as backward compatibility
-greatest diffusion is in areas where end users are sophisticated technology users

The origin of four Open Source software programs were reviewed: (p. 207-212)

Apache - 1994, Brian Behlendorf, modular development, first commercial internet server, unix based network computer system
Linux - 1991, Linus Torvalds, done from intellectual curiosity rather than pressing need, commercially attached firms include VALinux and Red Hat
PERL - 1987, Larry Wall, stands for Practical Extraction and Reporting Language, responding to repetitive system admin tasks with Unix
Sendmail - late 1970's, Eric Allman, created a standard method of routing email

Who contributes to Open Source and what are the motivations - many do a little, few do the most, quite elitist, core group as key contributors (p.206)

Motivations - the net benefit = immediate payoff + the delayed payoff (p.212-215)
Immediate costs - programmers forego monetary compensation; opportunity costs when not focusing on the primary mission
Immediate benefits - improve rather than reduce performance in the primary mission; more fun than the routine programming tasks

Delayed costs - career concern incentive - possible future job offers from work done now
Delayed benefits - ego gratification incentive - desire for peer recognition
-from an economic perspective these are similar and fall under a single heading 'Signaling Incentives'; this is stronger if performance is visible, the higher impact of the performance, if performance is seen as talent, audience sees it relative to 'fad

Comparison between Open Source and Closed Source motivations (p. 216-219)

Short Term
-alumni effect

-customization and bug fixing benefits
- prorgrammers get salary
Deferred Compensation
-better performance measurement
-outsiders can see what is being created

-full initiative; programmers take responsibility for their own work

-greater fluidity; knowledge is transferrable to new environments

-sophisticated users see it as a part of entry, signaling talent to peers,
showing talent to possible employers
-outside evaluation not possible in any detail

-boss driven rather than individually driven

-knowledge not transferrable; proprietary
Individual Incentives include - motivation to solve problems they encounter in day to day work, giving credit to authors providing for accrued reputational benefit, possible access to venture capital

Characteristics of organization and governance of Open Source projects - production is modular with distinct components, provides for fun and challenging work, leaders assemble critical mass of code but do not perform too much of the job on their own, members identify challenges (p. 220)

Nature of Leadership in Open Source environments (p.221-223)
-there is strong centralized authority
-leaders are programmers who develop initial code
-leaders' initial experience establishes their credibility in the community
-leader has no formal authority but has substantial 'real' authority
-leader makes recommendations that includes the initial vision
-leader updates goals as the project evolves
-leader certifies quality of the work
-leader is not driven by ego, commercial or political bias
-leader needs to be charismatic
-leader clearly communicates goals, procedures and evaluations

Reaction of commercial to open source (p.223-227)
-attempts to emulate some of the incentive features of open source processes
-try to mix open and closed source processes to get the best of both worlds
-option to list people working on specific projects
-try to share/promote code sharing within the company
-commercial companies benefit indirectly in complimentary proprietary segments eg. Red Hat
-act as intermediaries between open and closed source

Questions remaining (p.228-231)
1. characteristics of projects that make it a good open source option
- role of applications and related programs (will it permit synchronization of upgrades and backward compatibility
- infuences of competitive environments
- project lifespan - longer duration of projects
2. optimal licensing - hijacking of projects, middleware producers, GPL license tested in court
3. coexistence of commercial and open source -symbiotic, altering programmers incentives
4. open source process transposed to other industries?