«The market for open-source software—uncopyrighted, freely reproducible computer programs—is not well understood by economists. A central source of surprise is that innovation can thrive in a market without traditional intellectual property (IP). But as we argued in a 2005 unpublished paper, “Perfectly Competitive Innovation,” as a matter of theory there is no reason to believe that monopoly power through IP is needed for innovation. The market for open-source software is the poster child for this perspective.
First, understand that the market for open-source software is a classic example of a competitive market. It is characterized by the voluntary renunciation of copyright and patent. Buyers are entitled to make their own copies, modified or not, and sell them. “Free software” in this context means “free as in freedom, not free as in beer.” There is also voluntary renunciation of trade secrecy: the original creator publishes the source code—the “blueprint” for producing the software—along with the software itself. Some open-source software has the further requirement that as a condition of use, buyers make their modification available under the same terms. The open-source movement has been called everything from a virus to socialism—so it may or may not be surprising to hear it called a model of a fully competitive market. Yet that is what it is, as much so as the market for wheat. All purchasers of software can compete with the seller and one another, and often they do. (...)
The presence of profitable firms such as Red Hat—not to speak of IBM—in the open-source industry suggests that it is a viable concern and not a charitable or altruistic activity. In their 2004 paper “The Economics of Technology Sharing: Open Source and Beyond,” Josh Lerner and Jean Tirole documented some of the financial benefit to individual developers of contributing to open-source projects. For example, the team of programmers that developed the Apache web server are ranked according to the significance of their contributions and hold other jobs. Work by Il-Horn Hann et al. shows that the salaries the programmers receive in these other jobs are heavily influenced by their rank within the Apache Foundation. In other words, the “expertise” model at Apache is much like that in academia—the programmer writes software in order to receive recognition and financial payment for the expertise he demonstrates through his published product.
Examination of particular individual developers reinforces this point. Torvalds is a multimillionaire, and Bram Cohen, the developer of BitTorrent, recently received $8.75 million in venture capital for his open-source project. These figures and the success of open-source software also teach us something important about the (expected) payments needed to get smart people like Torvalds or Cohen to develop innovative software. It is unlikely that Torvalds originally wrote Linux with the aim of becoming a multimillionaire. Still, he must have hoped for some revenue stream when starting his work. His current wealth is probably higher than he expected. Still it is four orders of magnitude less than that of Bill Gates. Hence, at least in the case of Torvalds, the opportunity cost for writing innovative software is not in the tens of billion of dollars, but just in the millions. This is worth keeping in mind when someone claims that without the huge monopoly rents through IP, innovators would not be innovating. Finally, it is possible to imagine that the open-source industry is not a real industry at all. Perhaps it exists only because it is able to free-ride off the innovations created in the proprietary part of the industry, in which the monopoly power of copyright plays a key role. It is certainly true that Linux is a knock-off of Unix and that OpenOffice Writer is a knock-off of Microsoft Word. But this means little, because practically all software, proprietary or not, is an imitation of some other software. Microsoft Windows is an imitation of the Macintosh, which is an imitation of Smalltalk. Microsoft Word is an imitation of WordPerfect, which is an imitation of WordStar. Microsoft Excel is an imitation of Lotus
1-2-3, which was an imitation of VisiCalc. And so on. (...)
Probably the most innovative program in the last few years is BitTorrent, a program that decentralizes and vastly increases the speed at which very large files can be downloaded off the Internet. It is commercially successful in the sense that 50,000 copies a day are downloaded. It is also sufficiently innovative that it is now being imitated—by Microsoft. BitTorrent, however, is open-source, and according to its website, author Bram Cohen maintains the program for a living.
The final point to emphasize here is that the market for software is not unique. Innovation and competition unprotected by patent and copyright have gone hand in hand in other industries, from financial securities to fashion. The message of open-source software is a message for all industries: IP not needed for innovation here»