[LUAU] Game theory of Software licensing

[Jim Thompson]

There was some discussion after the "Open Source Pizza" Tuesday night  
about software licensing.   I recently ran across a paper that  
studies the conomic analysis of optimal licensing which compares free/ 
open licenses to proprietary licenses.  The key yardstick is the  
level of benefit or "welfare" provided to both consumers and to  
developers, while accounting for innovation over time.

It essentially (attempts to) answer this question:

If proprietary incentives matter for innovation, and if public access  
to a reusable free/open platform also matters for welfare, then what  
scope of protection creates the greatest good?


Here's what I took as the "key findings"

1) HIGHEST SOCIAL WELFARE
      a) The highest social welfare of any configuration is a pool  
of  "freedom motivated" developers matched with completely free/ 
openlicenses.  This is higher than a pool of "profit motivated"  
developers matched with proprietary licenses.
      b) BUT, if any fraction of the population is profit motivated,  
then the socially optimal license will ALWAYS contain the offer of a  
proprietary  period t > 0. This stimulates higher innovation.

      c) Regardless of whether an institution is freedom or profit  
motivated, the optimal license is more open than BSD in the sense  
that the length of proprietary protection on derivative works should  
not be arbitrarily long.  Multi-period innovation is thwarted by  
overlong protection.

2) PROFIT MOTIVATED FIRMS
The analytic framework allows the authors to consider stylized  
business models ranging from completely closed and proprietary (e.g.  
restrictive End-User-License-Agreements), through partially open  
access (e.g. allowing plug-ins and APIs), to subsidizing users and  
taking all profits on developer royalties (e.g. computer games), to  
non-profits that open all aspects of a platform.  They find that:

      a) Profit motivated firms rationally choose EULAs more often  
than is socially optimal.
      b) Decentralized innovation can increase profits over going it  
alone. For profit motivated firms, this means it becomes privately  
rational to choose open licenses once reuse and network effects pass  
a critical threshold.  This effect can even dominate subcontracts  
with targeted  developers.
      c) Even non-profits can benefit by harnessing the efforts of  
profit-motivated developers and giving them a brief period to charge  
for the value of their investments.

3) PLATFORM OWNER TENURE
One open question has been whether large projects need "sponsors."   
In general, the authors find that they do.

More specifically, they find that a platform sponsor needs to  
exercise a long term interest in a platform as a means to enforcing  
good behavior on the part of decentralized profit motivated  
developers.  A prisoner's dilemma emerges in which anyone who likes  
to charge prefers to do so as long as possible but, if they do, then  
the whole community suffers.  If a license can enforce a reasonable,  
i.e. short term, proprietary period then everyone, including the  
developer, wins over multiple periods of innovation.  For this to  
work, the tenure of the platform sponsor must survive multiple  
periods of tenure for downstream developers.

4) PIRACY
Even if no reuse is possible and innovation never occurs, conditions  
exist where a profit motivated firm prefers to allow limited piracy,  
interpreted as free user access, to a portion of its products.   
Roughly interpreted,  word-of-mouth effects on sales can dominate  
lost sales.



This paper is written for an academic audience.  So, it can be  
mathematically challenging, but if you want a "proof" of certain  
free / open source arguments, here it is:  http://papers.ssrn.com/ 
sol3/papers.cfm?abstract_id=639165