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Erosion of Monopoly Power due to the Emergence of Linux

Discussion Papers 231, 23 S.

Jürgen Bitzer

2001. Nov.

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The emergence and market success of Linux in recent years has been impressive. Contrary to common belief, commercial enterprises are active only in the provision of services (including distribution) related to Linux. The emergence of this service market has paved the way for Linux to become a low-cost product and a serious competitor in formerly monopolistic market segments. This paper demonstrates that there is no a priori reason why the incumbents should necessarily survive in these segments. Their exit would, in fact, lead to these segments' collapse. A simple model is used to show that the emerging price pressure on the former monopolists depends on the extent of the current heterogeneity between Linux and the operating systems of the incumbents and thus ultimately on customers' preferences. The absence of development costs for Linux distributors leads to cost advantages on the part of the entrants. This could lead the incumbents to stop development of their operating systems when the extent of product differentiation supported by the market no longer permits coverage of their average costs. This in turn would result in the collapse of the respective market segments, as new entrants would offer only services related to Linux.

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