Licensing fees vs open source software

I work (if you can call it that…) for an organisation that uses a suite of Microsoft applications. In addition to Windows XP it runs MS Office. For the ability to do this, a licensing fee, probably quite sizeable (I don’t know though) is paid to Microsoft.

Now, it was pointed out to me that an open source alternative, “Open Office” is compatible with MS Office, and has most all of the same functionality. There would have to be some retraining, however, to ensure that everyone could use it correctly.

It was put to me that my organisation could save quite substantial sums (even after the cost of retraining for its use) from changing to this alternative, and that there would be very few costs to the change.

I searched for reasons why this person was wrong:

  • We work collaboratively with a lot of other organisations, and need to be using the same software. But apparently they are completely compatible.
  • The support that microsoft offers means it is much safer to use MS office. I can’t recall the response, but apparently this isn’t a big deal.
  • People just won’t retrain and will insist on using MS Office because it is what we know. My friend scoffed with contempt.

Why do we all pay so much to use Microsoft intellectual property? I have my suspicions why, but would like to hear from others.

Patents not so evil after all…

We’ve previously blogged about the potential for patent protections to restrict innovation when inventions are sequential. However, Sudipto Bhattacharya and Sergei Guriev suggest on VoxEU that the research we cited by Bessen and Maskin might be misleading. In particular they point out that there is a ‘third way’ that knowledge can be treated.

Rather than patent it or make it public, a firm may choose to simply keep the information private as a trade secret. It can then be licenced to a vendor in return for royalties. Unfortunately, this is less efficient than patents because the vendor will under-invest in development of the technology. Essentially this is because the vendor bears the whole cost of further development but is forced to pay a portion of the revenue generated from that investment to the original inventor in the form of royalties. The authors claim that decreasing patent protections could thus cause more inventions to be kept secret and inefficiently licenced, which reduces total welfare.

As a consequence is that the number of ideas available to firms to develop is probably a concave function of the level of patent protection, with an interior maximum! With no patent protections ideas are kept as trade secrets and handed out under exclusive licences. With full patent protection it is too costly to licence the patent and develop the idea. In both cases the level of innovation will be low. Somewhere in between is the ideal level of intellectual property rights enforcement. So even if innovation is sequential, reducing patent protections has the potential to stifle further invention, although not for the reasons usually cited.

NB. Besson and Maskin’s paper isn’t directly comparable with the Vox paper: the former use complementarities to drive their result while the latter exclude such complementarities and allow for private information. Bhattacharya and Guriev are therefore considering a more general problem than B & M, which is why I describe reliance on the B & M result as misleading: it doesn’t represent the vast majority of industries in which patents are used.