Open versus Closed Source

In spite of Microsoft’s quasi monopoly position in the market for operating systems Linux has succeeded to become a serious competitor of Microsoft Windows. From an economic standpoint this fact raises some puzzles. In this paper we focus on the development and production of a complex team product by a loosely coupled group of unpaid volunteers. Applying arguments from the theory of the firm a centralized monitoring system should be the expected governance structure in such circumstances. However, Linux does not have a classical firm’s governance structure but seems to be quite successful competing with Microsoft Windows despite having been developed by “hobbyists”. Analyzing this puzzle we estimate that the success of Linux is not caused by the product Linux but by the development system Linux. So we try to explain its advantages compared to Microsoft and to estimate the success of Linux in the long run.