Navigating the Deployment Dilemma and Innovation Paradox: Open-Source versus Closed-source Models

Recent advances in Artificial Intelligence (AI) have introduced a popular paradigm in Machine Learning (ML) model development: pre-training and domain adaptation. As both closed-source developers and open-source community lead in pre-training foundation models, domain deployers face the dilemma about whether to use closed-source models via API access or to host open-source models on proprietary hardware. Using closed-source models incurs recurring costs, while hosting open-source models requires substantial hardware investments and may lead to potentially lagging advancements. This paper presents a game-theoretical model to examine the economic incentives behind the deployment choice and the impact of open-source engagement strategies on technological innovation. We find that deployers consistently opt for closed-source APIs when the open-source community engages reactively by maintaining a fixed performance ratio relative to closed-source advancements. However, open-source models can become preferable when a proactive open-source community produces high-performance models independently. Furthermore, we identify conditions under which the engagement and competitiveness of the open-source community can either foster or inhibit technological progress. These insights offer valuable implications for market regulation and the future of technology innovation.