Lock in and Switch: Asymmetric Information and New Product Diffusion
16 Pages Posted: 13 Oct 2008
Date Written: April 2007
Many new web-based services are introduced as free services. Depending on the sellerâ¬"s business model, some remain free in the long run, while others switch to pay mode at some point in time. I characterize the relation between buyers and a new service seller when the former are uncertain about the latterâ¬"sbusiness model. I derive a natural signalling equilibrium where the seller plays a â¬Slock-in-and-switchâ¬? strategy, while buyers play a â¬Swait-and-seeâ¬? strategy. I show the equilibrium entails diffusion even though consumers are identical and equally aware of the new serviceâ¬"s existence.
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