Underlying Consumer Heterogeneity in Markets for Subscription-Based IT Services with Network Effects

Information Systems Research, 2012, Vol. 23, No. 4, pp. 1322-1341

Posted: 22 Jun 2011 Last revised: 27 Oct 2015

See all articles by Marius Florin Niculescu

Marius Florin Niculescu

Georgia Institute of Technology - Scheller College of Business

Hyoduk Shin

University of California, San Diego (UCSD) - Rady School of Management

Seungjin Whang

Stanford Graduate School of Business

Abstract

In this paper we explore the underlying consumer heterogeneity in competitive markets for subscription-based IT services that exhibit network effects. Insights into consumer heterogeneity with respect to a given service are paramount in forecasting future subscriptions, understanding the impact of price and information dissemination on market penetration growth, and predicting adoption path for complementary products that target the same customers as the original service. Employing a continuous-time utility model, we capture the behavior of a continuum of consumers who are differentiated by their intrinsic valuations from using the service. We study service subscription patterns under both perfect and imperfect information dissemination. In each case, we first specify the conditions under which consumer rational behavior supported by the utility model can explain a general observed adoption path, and if so, we explicitly derive the analytical closed-form expression for the consumer valuation distribution. We further explore the impact of awareness and distribution skewness on adoption. In particular, we highlight the practical forecasting importance of understanding the information dissemination process in the market as observed past adoption may be explained by several distinct awareness and heterogeneity scenarios which may lead to divergent adoption paths in the future. Moreover, we show that in the later part of the service lifecycle the subscription decision for new customers can be driven predominantly by information dissemination instead of further price markdowns. We also extend our results to time-varying consumer valuation scenarios. Furthermore, based on our framework, we advance a set of heuristic methods to be applied to discrete-time real industry data for estimation and forecasting purposes. In an empirical exercise, we apply our methodology to the Japanese mobile voice services market and provide relevant managerial insights from the analysis.

Keywords: Subscription-Based IT Services, Consumer Utility Models, Consumer Information Awareness, Network Effects, Sticky Behavior, Adoption Delay

JEL Classification: A10, C00, C62, D00, D11, D30, D50, D80

Suggested Citation

Niculescu, Marius Florin and Shin, Hyoduk and Whang, Seungjin, Underlying Consumer Heterogeneity in Markets for Subscription-Based IT Services with Network Effects. Information Systems Research, 2012, Vol. 23, No. 4, pp. 1322-1341. Available at SSRN: https://ssrn.com/abstract=1869168 or http://dx.doi.org/10.2139/ssrn.1869168

Marius Florin Niculescu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-385-3105 (Phone)

HOME PAGE: http://scheller.gatech.edu/directory/faculty/niculescu/index.html

Hyoduk Shin

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Seungjin Whang

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4756 (Phone)
650-725-0468 (Fax)

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