Competing on Free(mium): Digital Competition with Network Effects

56 Pages Posted: 13 Jun 2017 Last revised: 25 Feb 2019

See all articles by Kevin Boudreau

Kevin Boudreau

Northeastern University; National Bureau of Economic Research (NBER)

Lars Bo Jeppesen

Copenhagen Business School - Department of Innovation and Organizational Economics

Milan Miric

University of Southern California, Marshall School of Business

Date Written: February 22, 2019

Abstract

“Freemium” product strategies—in which a free basic version of a good is offered alongside a full “premium” paid version—have become relatively common in digital products and services. When should freemium be used? Will appropriate use of freemium be associated with high profits? Building on past research, we predict that the answer relates to the closeness of competition in the market, the strength of network effects, and the market position relative to a competitor. Our main contribution is to bring empirical evidence to systematically test whether, the strengthening of network effects, studied through the establishment of “Game Center” on the Apple App Store (in a differences-in-differences research design) influenced the use of freemium strategies and subsequent performance. Consistent with theory, we find Game Center led to increased freemium use, a consolidation of market share around market leaders, lower performance for market follower firms, and ambiguous effects on market leader performance. The theory and evidence show that freemium and network effects do not always increase performance and profits. Even as the market share of the leader grows with freemium and network effects, freemium can spur an off-setting race-to-the-bottom price competition.

Keywords: Digital Innovation, Freemium, Network Effects, Competitive Strategy

Suggested Citation

Boudreau, Kevin and Jeppesen, Lars Bo and Miric, Milan, Competing on Free(mium): Digital Competition with Network Effects (February 22, 2019). Available at SSRN: https://ssrn.com/abstract=2984546 or http://dx.doi.org/10.2139/ssrn.2984546

Kevin Boudreau

Northeastern University ( email )

805 Columbus Ave, Interdisciplinary Sci & Eng Bldg
Huntington Ave
Boston, MA 02115
United States

HOME PAGE: http://www.kevinboudreau.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lars Bo Jeppesen

Copenhagen Business School - Department of Innovation and Organizational Economics ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

Milan Miric (Contact Author)

University of Southern California, Marshall School of Business ( email )

Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States

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