Here is a new paper on the economics of open-source software by Michael Schwarz and Yuri Takhteyev.  They approach the subject from an interesting angle.  Most authors are focused on the question of why people contribute to open-source.  Instead these authors point out that people contribute to all kinds of public goods all the time and there should be no surprise that people contribute to open-source software.  Instead, the question should be why do contributions to open source software turn out to be so much more important than say, giving away free haircuts.

The answer lies in a key advantage open-source has over proprietary software.  Imagine you are starting a business and you are considering adopting some proprietary software and this will require you to train your staff to use it and make other complementary investments that are specific to the software.  You make yourself vulnerable to hold-up:  when new versions of the software are released, the seller’s pricing will take advantage of your commitment to the software.  Open source software is guaranteed to be free even after improvements are made so users can safely make complementary investments without fear of holdup.

The theory explains some interesting facts about the software market.  For example, did you know that all major desktop programming languages have open source compilers?  But there are no open source tools for developing games for consoles such as the X-box.

The paper outlines this theory and describes how it fits with the emergence of open source over the years.  The detailed history alone is worth reading.