A Criterion from the General Equilibrium Model on Providing an Open or a Closed Source Software

Chu, Chih-Ning & Chou, Jerome. C.

The movement of open source code software, a.k.a. the free software, is a significant development of software production. Free software does not implies that the software is free of charge, like freeware. It implies that the software users has more degree of freedom if they have source code on hand. In other words, free software (or open source code software) could also be a proprietary software if people could find an appropriate basic structure, a.k.a. business model, to support its development.

It seems to be a counter-intuitive way both to improve the software perfomance and to increase the profit rate with open source software. As a programmer releases his source code, it will erode the foundation of software property right since it is hard to charge as the closed one as usaul. However, in the real world, some people still release their source code, and the abundance of free software
demostrate high performance efficiency.

In this article, we try to illustrate that if there exists an appropriate market mechanism inducing appropriate network effect of division of labor, free software is one of effective ways to develop software for the society. From the study of free software phenomenon, we assert that some clear contract could play the role of the property right if the benefit of network effect from the division of labor offsets the loss of choosing an ambiguous property right contract, for example, the open source software. In other words, if there exists a network effect which follows a ``less restrictive (or non-restrictive)'' contract of the intermediate good, the function of definite property right can be substituted by an ambiguous property right.

We find that it is a parital analysis if we just consider the trade-off between open source and closed source selection. We must also consider the transaction efficiency of labor to get the full picture, since software is usually an intermediate good, which sometimes can be replaced by labor.

There is an accidental finding about the nature of firm here. We show a case that the transaction efficiency between the intermediate good and the labour is neither the necessary nor the sufficient condition of the existence of a firm. It means that we find a counterexample of Coase-Cheung Thoery, since it does not consider the possibility of providing different final goods with different transaction efficiency. That is, the full picture of the emergence of firm must take the network effect on transaction efficiency of both the intermediate and the final good into consideration as well.

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