Open Source - Market Aspects

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  1. The emergence of Peer Production is dependent on the level of Transaction Costs and Coordination Costs
  2. See Transaction Costs Theory for background
  3. Open Source Software is embedded in markets, hence Open Source Commercialization and Open Source Business Models
  4. The issue of Open Source - Ownership


Manuel DeLanda on Open Source as a Market:

"The conception of the market prevalent in analyses of the open-source movement is basically the neo-classical version of Adam Smith's invisible hand (general equilibrium theory), where economic agents have optimizing rationality and perfect information about prices. This is clear in Raymond's use of expressions like "maximizing reputational returns". Simon, on the other hand, persuasively argues that human beings cannot reach optimal decisions, their bounded rationality (their limited computational resources) allowing them at most to reach satisfactory compromises. If decentralized markets are better than centralized hierarchies it is "because they avoid placing on a central planning mechanism a burden of calculation that such a mechanism, however well buttressed by the largest computers, cannot sustain. [Markets] conserve information and calculation by making it possible to assign decisions to the actors who are most likely to possess the information (most of it local in origin) that is relevant to those decisions." Needless to say, the conception of markets that is used in Transaction Cost economics is the von Hayek/Simon one, as it is clear from the fact that the first transaction cost mentioned by Coase is the costs of finding information about prices. But in addition to limited rationality, limited honesty (or the costs of opportunism) are also added.

Now, when I claim that the governance structure behind the Linux project is a hybrid of market and hierarchy, it is the "informational" definition of markets that I have in mind. Clearly, in the Linux project prices do not play the role of transmitters of information (since no one gets compensated monetarily) but the definition of a "market-like structure" may be broadened to include other means of transmitting information. The key is the decentralized use of local information. Analyses of the dynamics of the project based on interviews with participants seem to confirm this point. There is, on one hand, a hierarchical component comprised by Linus Torvalds himself, and a group with a changing composition (including Alan Cox, Maddog Hall and 6 to 12 others) of his closest associates. This core group, however, is not formally defined and has no real power to compel obedience from those outside of it. The members of the core group do play a key informational job mediating between "Torvalds and the development community, providing an effective filter to reduce the [informational] load reaching Torvalds - effective to the very extent that, while Torvalds still insists that he reviews every line of code he applies to the kernel, some people think that this is unnecessary... suggesting the general reliability of the decentralized development below Torvalds."

On the other hand, the power of the hundreds of people that do not belong to this core group lies precisely in the local information that they can bring to bear, information which can only be gathered by users of a program who know what is relevant to them. Like Simon's markets, these users are a "parallel computer", a vast geographically dispersed army of programmers working simultaneously (in parallel) finding bugs and, as Raymond puts it, collectively exploring the space of possible program designs.

The possibility of tapping into this reservoir of resources without the aid of prices to convey information is usually explained by the existence of the Internet. Torvalds is given the credit for having been the first to exploit this latent capability but I think it is fair to say that he stumbled upon, rather than planned, this possibility. Hence my characterization of the emergent governance structure as an unintended consequence of intentional action." (


  1. Oliver E. Williamson, 'Chester Barnard and the Incipient Science of Organization' in Organization Theory. Op. Cit. pp185-190.
  2. Ko Kuwabara, Linux: A Bazaar at the Edge of Chaos, Chapter 3,
  3. Eric Raymond, The Cathedral and the Bazaar, Section 6,