Generating Value Through Open Source: Software Service Market Regulation and Licensing Policy

In the software industry, commercial open-source software vendors have recognized that providing services to help businesses derive greater value in the implementation of open source–based systems can be a profitable business model. Moreover, society may greatly benefit when software originators choose an open-source development strategy as their products become widely available, readily customizable, and open to community contributions. In this study, we present an economic model to study how software licensing attributes affect a software originator’s decisions, aiming to provide policy makers with insights into how welfare-improving, open-source outcomes can be incentivized. We show that when a competing contributor is apt at reaping the benefits of software development investment, a less restrictive open source license (e.g., Berkeley Software Distribution, or BSD style) can improve welfare. On the other hand, when the originator is better at leveraging investment and service costs are high, a more restrictive license (e.g., General Public License, or GPL style) can be best for social welfare even when a contributor can cost-efficiently develop the software. The online appendix is available at https://doi.org/10.1287/isre.2017.0726

The Impact of Contracts and Competition on Upstream Innovation in a Supply Chain

We consider a supply chain with an upstream supplier who invests in innovation and a downstream manufacturer who sells to consumers. We study the impact of supply chain contracts with endogenous upstream innovation, focusing on three different contract scenarios: (i) a wholesale price contract, (ii) a quality-dependent wholesale price contract, and (iii) a revenue-sharing contract. We confirm that the revenue-sharing contract can coordinate supply chain decisions including the innovation investment, whereas the other two contracts may result in underinvestment in innovation. However, the downstream manufacturer does not always prefer the revenue-sharing contract; the manufacturer's profit can be higher with a quality-dependent wholesale price contract than with a revenue-sharing contract, specifically when the upstream supplier's innovation cost is low. We then extend our model to incorporate upstream competition between suppliers. By inviting upstream competition, with the wholesale price contract, the manufacturer can increase his profit substantially. Furthermore, under upstream competition, the revenue-sharing contract coordinates the supply chain, and results in an optimal contract form for the manufacturer when suppliers are symmetric. We also analyze the case of complementary components suppliers, and show that most of our results are robust

Optimal Timing of Sequential Distribution: The Impact of Congestion Externalities and Day-and-Date Strategies

The window between a film’s theatrical and video releases has been steadily declining with some studios now testing day-and-date strategies (i.e., when a film is released across multiple channels at once). We present a model of consumer choice that examines trade-offs between substitutable products (theatrical and video forms), the possibility of purchasing both alternatives, a congestion externality affecting consumption at theaters with heterogeneous consumer groups, and a decay in the quality of the content over time. Our model permits a normative study of the impact of shorter release windows (zero–three months) for which there is a scarcity of relevant data. We characterize the market conditions under which a studio makes video release time and price selections indicative of direct-to-video, day-and-date, and delayed video release tactics. During seasons of peak congestion, we establish that day-and-date strategies are optimal for high-quality films with high content durability (i.e., films whose content tends to lead consumers to purchase both alternatives) whereas prices are set to perfectly segment the consumer market for films with low content durability. We find that lower congestion effects provide studios with incentives to delay release and price the video to induce multiple purchasing behavior for films with higher content durability. However, an increase in congestion effects can, in certain cases, actually lead to higher studio profitability. We also show that, at the lower range of quality, an increase in movie quality should often be accompanied by a later video release time. Surprisingly, however, we observe the opposite result at the upper range of movie quality: an increase in quality can justify an earlier release of the video

Designing User Incentives for Cybersecurity

How to encourage better user security practices and behavio

Designing user incentives for cybersecurity

How to encourage better user security practices and behavio

Designing User Incentives for Cybersecurity

How to encourage better user security practices and behavio

Cloud Implications on Software Network Structure and Security Risks

By software vendors offering, via the cloud, software-as-a-service (SaaS) versions of traditionally on-premises application software, security risks associated with usage become more diversified. This can greatly increase the value associated with the software. In an environment where negative security externalities are present and users make complex consumption and patching decisions, we construct a model that clarifies whether and how SaaS versions should be offered by vendors. We find that the existence of version-specific security externalities is sufficient to warrant a versioned outcome, which has been shown to be suboptimal in the absence of security risks. In high security-loss environments, we find that SaaS should be geared to the middle tier of the consumer market if patching costs and the quality of the SaaS offering are high, and geared to the lower tier otherwise. In the former case, when security risk associated with each version is endogenously determined by consumption choices, strategic interactions between the vendor and consumers may cause a higher tier consumer segment to prefer a lower inherent quality product. Relative to on-premises benchmarks, we find that software diversification leads to lower average security losses for users when patching costs are high. However, when patching costs are low, surprisingly, average security losses can increase as a result of SaaS offerings and lead to lower consumer surplus. We also investigate the vendor’s security investment decision and establish that, as the market becomes riskier, the vendor tends to increase investments in an on-premises version and decrease investments in a SaaS version. On the other hand, in low security-loss environments, we find that SaaS is optimally targeted to a lower tier of the consumer market, average security losses decrease, and consumer surplus increases as a result. Security investments increase for both software versions as risk increases in these environments

Optimal Timing of Sequential Distribution: The Impact of Congestion Externalities and Day-and-Date Strategies

The window between a film’s theatrical and video releases has been steadily declining with some studios now testing day-and-date strategies (i.e., when a film is released across multiple channels at once). We present a model of consumer choice that examines trade-offs between substitutable products (theatrical and video forms), the possibility of purchasing both alternatives, a congestion externality affecting consumption at theaters with heterogeneous consumer groups, and a decay in the quality of the content over time. Our model permits a normative study of the impact of shorter release windows (zero–three months) for which there is a scarcity of relevant data. We characterize the market conditions under which a studio makes video release time and price selections indicative of direct-to-video, day-and-date, and delayed video release tactics. During seasons of peak congestion, we establish that day-and-date strategies are optimal for high-quality films with high content durability (i.e., films whose content tends to lead consumers to purchase both alternatives) whereas prices are set to perfectly segment the consumer market for films with low content durability. We find that lower congestion effects provide studios with incentives to delay release and price the video to induce multiple purchasing behavior for films with higher content durability. However, an increase in congestion effects can, in certain cases, actually lead to higher studio profitability. We also show that, at the lower range of quality, an increase in movie quality should often be accompanied by a later video release time. Surprisingly, however, we observe the opposite result at the upper range of movie quality: an increase in quality can justify an earlier release of the video

Licensing and Competition for Services in Open Source Software

Open source software is becoming increasingly prominent, and the economic structure of open-source development is changing. In recent years, firms motivated by revenues from software services markets have become the primary contributors to open-source development. In this paper we study the role of services in open source software development and explore the choice between open source and proprietary software. Specifically, our economic model jointly analyzes the investment and pricing decisions of the originators of software and of subsequent open-source contributors. We find that if a contributor is efficient in software development, the originator should adopt an open-source strategy, allowing the contributor to offer higher total quality and capture the higher end of the market while the originator focuses on providing software services to lower end consumers. Conversely, if the contributor is not efficient in development, the originator should adopt a proprietary software development strategy, gaining revenue from software sales and squeezing the contributor out of the services market. In certain cases an increase in originator development efficiency can result in increased contributor profits. Finally, we find that, somewhat counterintuitively, an increase in contributor development efficiency can reduce overall social welfare