We study competitive interaction between a profit‐maximizing firm that sells software and complementary services, and a free open‐source competitor. We examine the firm's choice of business model between the proprietary model (where all software modules are proprietary), the open‐source model (where all modules are open source), and the mixed‐source model (where some–but not all–modules are open). When a module is opened, users can access and improve the code, which increases quality and value creation. Opened modules, however, are available for others to use free of charge. We derive the set of possibly optimal business models when the modules of the firm and the open‐source competitor are compatible (and thus can be combined) and incompatible, and show that (i) when the firm's modules are of high (low) quality, the firm is more open under incompatibility (compatibility) than under compatibility (incompatibility); (ii) firms are more likely to open substitute, rather than complementary, modules to existing open‐source projects; and (iii) there may be no trade‐off between value creation and value capture when comparing business models with different degrees of openness.
