Trial and Pricing Strategies of Software Market with Competition and Network Effects

45 Pages Posted: 1 Sep 2016 Last revised: 26 Oct 2016

See all articles by Zhenhua Wu

Zhenhua Wu

Arizona State University (ASU) - Economics Department

Zhijie Lin

Tsinghua University

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: October 25, 2016

Abstract

In this paper, we develop a framework to generally characterize the equilibrium trial and pricing strategies of oligopoly software market, when there exist competition, network effects (externalities), uncertainty on software functionality, network maintaining cost and compatibility issues. We find that, in equilibrium, the restriction on network effects is decreasing with network effects, but increasing with consumers’ basic willingness to pay. Meanwhile, the restriction on functionality is increasing with the posterior on the functionality after trial. The equilibrium price has a non-linear relation with the equilibrium network effects in a monopoly market and a market with completely incompatible software. However, the equilibrium price is set to maintaining cost in a market with completely compatible software. Moreover, we find that incompatibility could generate an equilibrium under which identical firms choose different trial and pricing strategies, and all consumers who want to purchase software are divided by firms on the market.

Keywords: software trial, pricing, market competition, network effects, compatibility

Suggested Citation

Wu, Zhenhua and Lin, Zhijie and Tan, Yong, Trial and Pricing Strategies of Software Market with Competition and Network Effects (October 25, 2016). Available at SSRN: https://ssrn.com/abstract=2832599 or http://dx.doi.org/10.2139/ssrn.2832599

Zhenhua Wu (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Zhijie Lin

Tsinghua University ( email )

Haidian District
Beijing, Beijing 100084
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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