Open-Source Software – An Economic Assessment

Stefan Kooths, Ph. D., Markus Langenfurth, Ph. D., and Nadine Kalwey, Diplom-Volkswirtin

1/01/2005
(Original Publish Date: 2003)

Open-source software is deliberately developed outside of market mechanisms, as the main purpose of making the source code freely available is to prevent a price-controlled software market from evolving in the first place. This is a fact that commercial open-source business models cannot alter, especially not in the packaged software sector. The business transactions of such models take place in complementary markets and have at most an indirect effect on open-source software development. However, in any economy based on the division of labor, the market fulfills important information, coordination and incentive functions: it creates an equilibrium between customer wants and product supply (customer sovereignty), steers scarce resources towards their best-possible use (optimum allocation of resources), generates income and distributes it as warranted by performance (productivity-oriented factor compensation) and provides innovation incentives (progressive function). In such a market, prices are the main information medium for suppliers and demanders; without prices, the markets are unable to fulfill the above functions. When software is distributed free of consideration ("free"), however, it lacks this key price component, which results in the substantial economic and functional deficits of the open-source model.