Optimal Pricing of Information Goods under the Freemium Strategy in the Presence of Piracy and Network Effects

38 Pages Posted: 21 Jun 2016

See all articles by Guofang Nan

Guofang Nan

Tianjin University; Tianjin University - College of Management and Economics

Dan Wu

Tianjin University - College of Management and Economics

Minqiang Li

Tianjin University - College of Management and Economics

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: June 20, 2016

Abstract

Information goods providers adopt the freemium model to increase their user base and maximize their profits. However, a serious piracy problem cannibalizes the demand for legal goods and deeply harms firms’ interests. We investigate the optimal pricing of information goods under the freemium strategy in the presence of piracy and network effects. In this paper, we consider consumers’ perception change to determine the market structure by a two-stage model. In this model, consumers are heterogeneous in their goods quality preference, and they update their quality perception after using some or all functionality. We provide important insights into pricing decisions in all market structures under piracy for firms that adopt the freemium model. The results show that a portion of consumers who use free version will become paying consumers under some conditions. This finding explains why providing a free version is usually effective because it can not only expand the user base but also help the firm obtain more paying consumers. The results also show that some pirates will buy the premium version in the second stage in certain conditions, which confirms that pirated goods can be regarded as sampling goods to some extent. Finally, the premium version’s optimal price and the firm’s optimal profit increase in the network effects and piracy cost in the presence of piracy.

Keywords: Information Goods; Piracy; Freemium; Network Effects; Quality Perception; Pricing

Suggested Citation

Nan, Guofang and Nan, Guofang and Wu, Dan and Li, Minqiang and Tan, Yong, Optimal Pricing of Information Goods under the Freemium Strategy in the Presence of Piracy and Network Effects (June 20, 2016). Available at SSRN: https://ssrn.com/abstract=2798421 or http://dx.doi.org/10.2139/ssrn.2798421

Guofang Nan (Contact Author)

Tianjin University ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Dan Wu

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Minqiang Li

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Yong Tan

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States

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