Opening the source code: The threat of forking

Making software open source can have substantial positive effects
on the quality and diffusion of a software and strengthen the sales of comple-
mentary products. However, it is a large concern of firms that a competitor
might use the very same source code to start its own competitive project, a
so-called fork. This paper analyzes whether the threat of forking prevents a
firm to open its source code. We consider three different regimes: In the first
regime a firm develops and sells software under a proprietary license, in the
second regime, it uses an open source business model. The third regime is
characterized by the competition of two related open source projects. The
switching times between the regimes are optimally determined. We find that
the optimal strategy substantially depends on the initial state value and the
extent to which a competitor can make use of the firm’s software quality. A
small initial software quality can prevent a firm to open the code when it
cannot afford competition, only with a competitive advantage open source is
attractive then. For a large initial software quality, a firm would never open
the code immediately, it would either wait or keep it proprietary forever.