Generally speaking, the term Open Source is mainly associated with OSS where the source code of the software is under a license. This ensure the developer that derivative works will be also available as a source code, protecting certain rights of the original authors and prohibiting restrictions on either how the software can be used or who can use it. In that context, anyone can freely use the code, with the permission to produce their own version, to make alterations and improvements on the existing code.
The phenomenon is accelerated by the development of ICT and the Internet. In fact, the web allows people to find peers who have the same hobby or they may experience a similar problem. Moreover, it allows people to work within a community with the support of online tools in order to provide a better and cheaper solution by posting code improvements that anyone can view. As a result, there is no separation between innovators and users: OSS promotes also innovation from the users’ side (von Krogh 2003) where the crucial role of communities and free revealing is obvious.
Users tend to reveal their ideas for free when the benefits exceed the following two main costs: loss to property rights linked to the intellectual property, and the cost of diffusion. With regard to that, it should be considered that many OSS contributors are students who do not have any basis for commercial rivalries with potential adopters (Lakhani and Wolf 2001; Hermann et al. 2000).
Notwithstanding, participants in OSS development are rewarded mainly by non-monetary incentives such as elevated reputations, expected reciprocity, and the incentive to help build a community (Lerner and Tirole 2002; von Hippel and von Krogh 2003). That is why OS entrepreneurs have an incentive to integrate users socially, by publicly acknowledging their contributions for a certain project (von Hippel and von Krogh 2003).
OSS quickly became an important and cultural phenomenon constituting a particular innovation model, something in between the private model (which considers returns to the innovator gains from private goods, and the efficient regime of intellectual property protection) and the “collective” action (where innovators collaborate to produce a public good in order to remedy the market failure).
As a result, studies on OSS present the “private-collective model”, which incorporated the better from each classical model (von Hippel and von Krogh 2003). This alternative model is a combination of private investment and collective actions. In fact users employ their own resources to privately invest in creating novel software code, without claiming proprietary rights over their code and preferring to freely reveal it as a public good. Consequently, there is an increase in terms of social surplus: new knowledge is created by private funding and then freely offered to all. In overall, the “private-collective model” assumes that innovation will be supported by private investment if the innovators can reap profits from doing so. In this model, any free revealing or uncompensated spillover of proprietary knowledge developed by private investment directly reduces the innovator’s profits. Hence, it is assumed that innovators will strive to avoid spillover of innovation-related information.
From the “private-collective model” perspective, free revealing is an enigma: it seems it makes no sense for innovators who invested money in developing process to intentionally give away information and knowledge for free (von Hippel and von Krogh 2003). However, the key point in OS is to understand why several top-notch programmers should contribute for free to the provision of a public good (Lerner and Tirole 2002). One reason is that software users benefit by using the OSS and its improvements; on the other hand manufactures do not have an incentive to innovate since they do not see any commercial opportunity, thus they stay out of the market. Nevertheless, it should be mentioned that companies may still profit from OSS. For example, Red Hat is a company which operates in OS environment more than as a software company does: “we are the bridge between the communities that create open source software and the enterprise customers who use it. Red Hat makes the rapid innovation of open source technology consumable in mission-critical, enterprise environments.In addition, IBM also adapts its business model by commercializing the functioning improvement of Linux.
Looking at the difference between OSS and proprietary software, there are three main dimensions that distinguish those elements (Kogut and Metiu 2001).
First of all, OSS is produced under different licences that assure public ownership without royalties by allowing users to make copies to distribute for further improvements under the same terms as the license of the original software (O’Reilly & Associates 1999). As a result, it has the characteristics of a public good which works under the particular open source licenses. The most far reaching permission is the GNU General Public Licence (GPL) which forces every program that contains a free software component to be left in its entirety as free software (being the reason why this licence is called “copyleft”). Therefore, it ensures that any derived software will remain free software. In contrast other OS licenses like the one of Apache allow programmers to make their modifications private. However, this kind of blending open and proprietary codes is recognized as a thread to the ideals of the open source community.
Secondly, user driven distributed innovation enables a very efficient new product development process, thanks to rapid feedback cycles and the implementation of software module in design and testing. In the traditional production, software is sold in a form giving no access to the source code. Therefore, customers have only limited possibilities to detect mistakes called “bugs” and to improve the program. They can only give feedback so the seller about the malfunctions, so the development and the debugging processes are separated. In contrast, in the OSS production the program innovations are disclosed to the users which leads a large audience to tests the program, debug it through the use and give immediate feedbacks. This is the reason why OSS is considered to have lower defect density than proprietary software and lower vulnerability to viruses (“given enough eyeballs, all bugs are shallow”, Raymond 2001). Moreover, users’ feedback is valuable also for the improvement of the code which is published and reviewed by peers before it becomes a part of the next release of the software. Thus it creates a new form of development like a “bazaar” where everyone has something to contribute versus a “cathedral” form, in which people work in a precise hierarchical order (Raymond 2001).
Thirdly, voluntary “communities of innovation” make sure that contributors share a strong culture (Wenger and Snyder 2000) and that members of these communities have a common understanding of what they do. They share collective knowledge on an expert level which helps communities members to overcome the “stickiness” of information (Brown and Duguid 1998). In contrast to proprietary software, OSS users are often more sophisticated. For example, Microsoft listens also to the wrong and less educated customers, while Linux developers are more willing to listen and able to identify the right customers (Nadeau 1999). This has had a big effect on the market, putting into competition the commercial software and the OSS which provides equal or even better performance (e.g. Open Office available for free vs. Microsoft Office). In addition, users are intrinsically motivated because of their voluntary work without time pressure, that foster creativity (e.g. Amabile 1998; Amabile, Hadley and Kramer 2002).
In conclusion, the private collective model describes how the division of the labour (Arora and Gambardella 1994) supports the process of software design and development and how companies can coordinate and control the standard commercialized software (Prandelli and Verona 2010). However, this model shows a limit of application in case the OS is applied to context requiring the tangibility of the product.
 See the interview with Tim O´Reilly in the Linux Journal, February 2001.