International Think-Tank on Innovation and Competition
Open source, Wikipedia and the Drivers of Innovation
March 31st, 2007
While intellectual property rights are fundamental drivers of innovations in all sectors, software development has recently been characterized by a large amount of innovations obtained in a decentralized, voluntary and uncompensated way by programmers within the so-called open source movement.
Technically, open source software is made available for direct use and modification (through direct access to the source code) under limited protection. For instance, the GPL (General Public License, first used in 1981 by Richard Stallman, the leader of the Free Software Movement) grants unlimited right to use, modify and distribute software as long as its redistribution makes available the modified source code and does not impose further restrictions on the rights granted by the GPL. These enforcement mechanisms make cooperative innovation quite effective and immune from free riding, but can create problems when an innovation includes both open source software and licensed proprietary software.
Major results of the open source movement are Linux, an Operating System based on Unix (an old Operating System first created at Bell Labs) and developed in 1991 by Linus Torvalds, Apache, a world wide web (HTTP) server, and Mozilla Firefox, a web browser. Besides software that is freely distributed, there is an increasing number of companies, like Red Hat and Novell, that profit from collateral services supplied jointly with free software. In theory, any rival could resell Red Hat software at a lower price because it is under GPL (and some firms actually do it), but Red Hat managed to sidestep this problem protecting its products with trademark law. In this sense, the difference between proprietary software and open source software appears much less relevant: the former earns from licenses to end-users, the latter mainly licenses software free of charge and earns from selling support description needed by end-users to install and run the software.
While many private corporations support open source software because they supply products that are complementary to open source software (IBM first of all, but also HP, Intel, Sun, Oracle,...), it remains surprising that such a large innovative process can take place, at least in part, through directly unrewarded efforts. Some economists, as Lerner and Tirole, have provided a few explanations for the incentives of these individual programmers: career concern, ego gratification and signalling activity are quite powerful and effective in this field. Unfortunately, the same nature of these incentives shows the possible limits of the innovative activity in the open source community: it is limited by the usual free riding problems emerging in the private provision of public goods (it is interesting that an information good as software is substantially a public good: it can be provided to new agents at no substantial cost and without reducing the utility of the other agents), it requires a complementary activity in the for-profit sector (to motivate the career concern and the signalling activity), it may be biased by research efforts that are different from general consumer needs and by adverse selection of the contributors, and it may be effective to solve a number of small and short term problems, but less effective to solve multi-sided challenges and approach long term projects. Notice that it is often claimed that open source software is more effective than proprietary software in debugging activity (since many programmers find and solve many defects within a software and make the solutions freely available), but may have big problems confronting issues as synchronization of upgrades and efficient levels of backward compatibility.
While the development of this new form of innovative activity is a symptom of high competitive pressure in the sector, it does not provide any evidence against the fundamental role of the protection of IPRs in driving core innovations. Actually, we believe that the current coexistence of open source software and proprietary software exerts a positive impact on innovation on both sides. To see why, think of a different sort of open source activity: Wikipedia is a famous and successful on line encyclopedia where anybody can post a new voice or edit an old one. While it contains a lot of useful and constantly updated information (especially in certain fields, as those related to the on line community), it often includes unmotivated and misleading references or mistakes that are the normal consequences of overlapping additions by heterogeneous contributors whose preparation is not properly controlled and whose effort is not rewarded. Traditional encyclopedias based on rewarded contributions by selected experts are not constantly updated as Wikipedia, but they provide a standard of quality and a balanced unifying structure that Wikipedia lacks. The trade-off for the end users is clear, and coexistence appears natural.
In a recent interesting book by Michele Boldrin and David Levine (see the version in Boldrin and Levine, 2005, Against Intellectual Monopoly) have adopted open source software as a main example of innovation created without IPRs, and have collected a large amount of anecdotic evidence suggesting that innovations can perfectly take place in absence of what they call "intellectual monopoly". Their idea behind this possibility is that the first mover advantage in the market of an innovator preserves a certain amount of profits even when entry of imitators is free, and this Stackelberg advantage can be sufficient to promote innovation. We already know from the theory of market leaders that leaders with a first mover advantage can obtain positive profits even in markets where entry is free by adopting aggressive strategies, and the standard Schumpeterian theory of growth is perfectly compatible with incentives deriving from the profits of a market leader facing free entry, rather than deriving from a monopolistic position. Therefore, the idea of Boldrin and Levine can have reasonable implications. However, the problematic point for the relevance of their provocative idea is another one: how much innovation can be promoted by the simple first mover advantage?
Without a deeper analysis of the industrial organization of the competition for the market it is quite hard to answer this question, and the general equilibrium analysis of Boldrin and Levine concluding that that the first mover advantage induces the first best amount of innovation neglects to a large extent the industrial organization of the market for innovations. Unfortunately, whether the incentives to invest are efficient or not is more an empirical question than a theoretical one, and we still don't see a consistent piece of evidence showing that current patent systems provide excessive incentives in a systematic way, or that we should totally eliminate IPRs, as Boldrin and Levine actually suggest.
As a matter of fact, the opposite may be true. Recently, Denicolò has analyzed a general model of the organization of innovations and has obtained a simple rule for the optimal level of patent protection: his empirical estimates suggest that current patent systems do not over-compensates innovators, while they may actually induce too limited incentives to invest in R&D.
This leads us back to the rational for the protection of intellectual property rights on software. We believe that the rationale for these patents is strong: while their main social gain is to promote innovation in the most dynamic sectors, the social cost is smaller than for other patents since in these sectors competition mainly works through frequent price-reducing and quality-improving innovations, therefore price distortions are less relevant and do not last long anyway. Neglecting these traditional economic insights, opponents of the patent system as Boldrin and Levine, have tried to claim that patents stifle innovation, but there is not clear empirical evidence behind these claims. In US, the extension of patent protection to CIIs started in 1980 (the first patent of this kind was granted by the US Patent and Trademark Office in 1981), and it was associated with a clear increase in R&D investment during the eighties. The R&D/sales ratio for US firms innovating on computer, telecommunications and electronic components (the relevant field here) increased from 5.5% to above 8% in 1989.
In a careful empirical study Mann (2005) has shown that patents bestow significant benefits, especially for start up companies, in terms of traditional appropriability, information signalling and cross-licensing revenue, while Merges (2006) looking at patent data in the US software market found that "new firms entry remains robust, despite the presence of patents (and, in some cases, perhaps because of them). Successful incumbent firms have adjusted to the advent of patents by learning to put a reasonable amount of effort into the acquisition of patents and the building of patent portfolios. Patent data on incumbent firms shows that several well-accepted measures of `patent effort' correlate closely with indicators of market success such as revenue and employee growth." In conclusion, we have no reason to doubt that standard incentive mechanisms to promote innovations based on the protection of intellectual property rights are effective in the software field as they are in many other fields.
