Free Trial or No Free Trial: Optimal Software Product Design with Network Effects

European Journal of Operational Research, Forthcoming

28 Pages Posted: 10 Jan 2008 Last revised: 1 Sep 2014

See all articles by Hsing Kenneth Cheng

Hsing Kenneth Cheng

University of Florida - Warrington College of Business

Qian Candy Tang

University of Florida - Warrington College of Business Administration

Date Written: 2007

Abstract

A common business strategy to promote product adoption in software industry is to provide a free trial version with limited functionalities of the commercial product to increase the installed user base. The increase of user base will lead to higher value of the software because of positive network effects. However, offering a free trial version may cannibalize some demand of the commercial software. This paper examines the tradeoff between network effects and the cannibalization effect, and aims to uncover the conditions under which firms should introduce the free trial product. We find that when network intensity is strong, it is more profitable for a software monopoly to offer free trial than to segment the market with two versions of different qualities. In addition, this paper solves the joint decision problem of finding the optimal quality for the firm's free trial software and the optimal price of its commercial product. Finally, we analyze the impact of competition on a firm's decision of whether to offer free trial in a duopoly market.

Keywords: software free trial, network effect, network externality, information goods

Suggested Citation

Cheng, Hsing Kenneth and Tang, Qian Candy, Free Trial or No Free Trial: Optimal Software Product Design with Network Effects (2007). European Journal of Operational Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1082120

Hsing Kenneth Cheng (Contact Author)

University of Florida - Warrington College of Business ( email )

P.O. Box 117169
Gainesville, FL 32611-7169
United States
352-392-7068 (Phone)
352-392-5438 (Fax)

Qian Candy Tang

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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