Many successful open-source projects have been developed by programmers who were employed by firms but worked on open-source projects on the side because of economic incentives like career improvement benefits. Such side work may be a good thing for the employing firms, too, if they get some strategic value from the open-source software and if the productivity of the programmers on these projects improves through learning-by-doing effects. However, the programmers may work more or less on these projects than what is best for the firms. To manage the programmers' efforts, the firms set appropriate employment policies and incentives. These policies and career concerns then together govern the programmers' effort allocation between the open-source and proprietary projects. We examine this relationship using a variant of the principal/agent model. We derive and characterize optimal employment contracts and show that firms either offer a bonus for only one of the two projects or do not offer any bonuses. However, if attractive alternate employment opportunities are available, they change their strategy and may offer bonuses for both projects simultaneously.
The Internet commerce technologies have significantly reduced sellers' costs of collecting buyer preference information and managing multiple prices. Advanced manufacturing technologies have also improved sellers' manufacturing flexibility. These changes allow an online seller to offer custom products at discriminatory prices. We show that these technologies offer significant advantages to an early adopter who gains market share and profits at the expense of the conventional seller. Not only does the customizing seller charge more for customized products, it also provides standard products but charges more for them than in a conventional market. The benefits of customization disappear when both the competing sellers adopt customization. They now compete not just on prices but also on degree of customization. Consequently, we see that the sellers "over-customize," to the detriment of their profits. Both the sellers know this when choosing their customization strategies and yet they both end up choosing to customize. A seller that does not customize sees a sharp decrease in profits if its competitor customizes. This is an instance of the "Prisoner's Dilemma" type of situation in technology adoption. This confirms some key findings in IT productivity and strategic IT investments literature.