This paper is concerned with the economic trade-offs associated with open-sourcing, the business strategy of releasing the source code of a commercial software product. We model open-sourcing as a strategic option for firms that compete in the market for software products. At the core of our model is the effect of open-sourcing on customer values, as well as the relative ease of customizing the open-source products.We show that open-sourcing can arise as an equilibrium outcome in our two-stage game. If the enhancement of customer value from open-sourcing is moderate or high, in equilibrium firms may find it optimal to release the source code of their commercial software products even when this strategy may reduce their profits.
