Competition between proprietary and open source vendors with security concerns

There exists fierce competition in both low-end and high-end markets between open source and proprietary vendors. This paper constructs a game-theoretic model based on Hotelling competition to examine such two types of vendors' market strategies with security threats. Each vendor can choose to enter high-end market by making the quality effort meet the quality requirement. Security threats are caused by software vulnerability and characterised by negative externalities. Technology similarity is an important element that improves the efficiency of quality effort by facilitating technology spillover but worsens security threats by sharing more vulnerability. Through solving equilibrium solutions by backward induction, I find that under different market strategies: (i) user innovation that contributes to the quality of software product and service of the open source vendor does not always increase its profit because price competition that is intensified by such innovation may offset the contribution; (ii) the risk of security threats benefits both vendors at the cost of user interest since it can soften price competition, while technology similarity that acts as another source of security threats decreases both vendors' profits. I finally indicate that thanks to user innovation, the open source vendor is relatively more likely to enter the high-end market.