A growing body of literature describes the open source phenomenon in the software industry. Drawing on transaction cost economics, we propose that open source projects illustrate a new generic governance structure — which we label bazaar governance — based on a specific legal contract: the open licence. We characterize this structure in terms of its strengths and weaknesses and compare it to market, firm and network forms. Low levels of control and weak incentives intensity are distinctive features of bazaar, lending a high uncertainty to governed transactions. However, bazaar governance promotes the openness of open source communities, which can generate strong positive network externalities and subsequent efficiency in cumulative transactions. Our theoretical developments offer a potential basis for future research.
This article is, to a certain extent, speculative, as it concerns a developing phenomenon — the open source — about which academic research has only recently proposed empirical contributions. We argue that this puzzling phenomenon can be conceptualized as the emergence of a new governance structure spurred by the institutional creativity of agents and propagated by the internet. Our theoretical model has three important consequences. First, as a generic governance structure, bazaar can be generalized to settings other than software. Second, because of its original characteristics, pure bazaar can be expected to experience a high rate of failure, despite the optimistic bias of the literature resulting from its focus on successes. And third, we can understand why instances of this archetypical form might evolve towards mixed governance forms to counterbalance its intrinsic weaknesses.