Author(s)
Andrei Hagiu
Source
AEI-Brookings Joint Center Working Paper No. 06-12, 2006
Summary
This paper compares “closed” to “open” software platforms.
Policy Relevance
Supporters of net neutrality and open source software assume that consumers benefit most from prices set at cost or zero. But often times networks offer more benefits when they are free to charge more.
Main Points
- Two-sided platforms” like Microsoft Windows or Google serve two (or more) different groups of customers, such as consumers and software developers.
- Microsoft Windows is a “closed” platform: developers and consumers pay to participate.
- Open source products like Linux are “open” platforms: both consumers and developers participate freely.
- Consumers value the two-sided platform more as more developers join, and developers value it more as more consumers join (“indirect network effects”).
- The “open” two-sided platform does not create “deadweight loss”, but at the same time it is unable to create and capture sufficient value from indirect network effects.
- A “closed” platform free to charge both types of customers creates deadweight loss through monopoly pricing on both sides, but at the same time it can create and capture significant value from indirect network effects. Therefore, on net it may create more economic value than the open platform for developers and/or consumers.
- Competition which drives prices down also prevents two-sided platforms from creating and extracting value from indirect network effects, which may sometimes lead to less economic value created than by a monopoly platform.
- Similarly, barring platforms from charging one group of customers can be harmful if the value from network effects cannot be captured.
