For software to be open source means that not only is the program itself free but the code it is compiled from is accessible to anyone. With the source code one can make changes to the program such as closing security holes, adding new features, improving stability and performance. The source code often still has a license that must be obeyed and of those there are some that require advancements be contributed back to the community. This means companies can take a program’s code, make their own changes to it, and then sell the new product for a profit but at least some of the changes must be given to the original program’s community. An example of such a company is Red Hat who makes an operating system based on open source Linux. Of course with the changes being given back to the community, free-riders can emerge that never contribute anything and take advantage of what others have invested time and money into. Why then is this scenario beneficial compared to the closed source market?
That is what Columbia Business School alumni Brett Gordon wanted to find out. By modeling a high-quality company that makes contributions to the code and a low-quality free-riding company the results showed there are spillover effects to keep prices low. The high-quality company by making advances the low-quality company may use can results in a lack of differentiation between their two products. So the high-quality company has to keep the price down to sell their product, otherwise consumers, looking for the better deal, will buy the free-riding company’s product. In the end, high-quality products are still being produced, and by the nature of the open source market, prices are kept down.