Open-source Economics

Yochai Benkler by Judith Carnaby

global village construction set

Open-source economics is an economic platform (a two-sided market with two distinct user groups that provide each other with network benefits) based on open collaboration for the production of software, services, or other products. First applied to the open-source software industry, this economic model may be applied to a wide range of enterprises. The system requires work or investment to be carried out without an expressed expectation of return; products or services are produced through collaboration between users and developers; there is no direct individual ownership of the enterprise itself.

The structure of open source is based on user participation. According to technology law professor Yochai Benkler, ‘networked environment makes possible a new modality of organizing production: radically decentralized, collaborative, and non-proprietary; based on sharing resources and outputs among widely distributed, loosely connected individuals who cooperate with each other without relying on either market signals or managerial commands.’

Most economists agree that open-source candidates are trading in something related to an information good (or ‘knowledge good), a type commodity whose main market value is derived from the information it contains. In general, this suggests that the original work involves a great deal of time, money, and effort. However, the cost of reproducing the work is very low, so that additional users may be added at zero or near zero cost – this is referred to as the marginal cost of a product. Copyright creates a monopoly so the price charged to consumers can be significantly higher than the marginal cost of production. This allows the author to recoup the cost of making the original work, without needing to find a single customer that can bear the entire cost. Conventional copyright thus creates access costs for consumers who value the work more than the marginal cost but less than the initial production cost. Access costs also pose problems for authors who wish to create a derivative work – such as a copy of a software program modified to fix a bug or add a feature, or a remix of a song – but are unable or unwilling to pay the copyright holder for the right to do so.

Being organized effectively as a consumers’ cooperative, the idea of open source is to eliminate the access costs of the consumer and the creators of derivative works by reducing the restrictions of copyright. Basic economic theory predicts that lower costs would lead to higher consumption and also more frequent creation of derivative works. Additionally some proponents argue that open source also relieves society of the administration and enforcement costs of copyright. Organizations such as Creative Commons have websites where individuals can file for alternative ‘licenses,’ or levels of restriction, for their works. These self-made protections free the general society of the costs of policing copyright infringement. Thus, on several fronts, there is an efficiency argument to be made on behalf of open-sourced goods.

However, others argue that because consumers do not pay for the copies, creators are unable to recoup the initial cost of production, and thus have no economic incentive to create in the first place. By this argument, consumers would lose out because some of the goods they would otherwise purchase would not be available at all. In practice, content producers can choose whether to adopt a proprietary license and charge for copies, or an open license. Some goods which require large amounts of professional research and development, such as the pharmaceutical industry (which depends largely on patents, not copyright for intellectual property protection) are almost exclusively proprietary.

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