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Free trial or no free trial: Optimal software product design with network effects

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  • Cheng, Hsing Kenneth
  • Tang, Qian Candy
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    Abstract

    A common business strategy to promote product adoption in software industry is to provide a free trial version with limited functionalities of the commercial product to increase the installed user base. The increase of user base will lead to higher value of the software because of positive network effects. However, offering a free trial version may cannibalize some demand of the commercial software. This paper examines the tradeoff between network effects and the cannibalization effect, and aims to uncover the conditions under which firms should introduce the free trial product. We find that when network intensity is strong, it is more profitable for a software monopoly to offer free trial than to segment the market with two versions of different qualities. In addition, this paper solves the joint decision problem of finding the optimal quality for the firm's free trial software and the optimal price of its commercial product.

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    File URL: http://www.sciencedirect.com/science/article/B6VCT-4Y52R07-5/2/a8b0253cb9ab9121208d4f6ca95d93cd
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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 205 (2010)
    Issue (Month): 2 (September)
    Pages: 437-447

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    Handle: RePEc:eee:ejores:v:205:y:2010:i:2:p:437-447

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Software free trial Network effects Information goods;

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    Cited by:
    1. Yifan Dou & Marius Florin Niculescu & Dongjun Wu, 2011. "Optimal Consumer Network Structure Formation under Network Effects: Seeds Controllability and Visibility," Working Papers 11-07, NET Institute, revised Oct 2011.
    2. Daniel Halbheer & Florian Stahl & Oded Koenigsberg & Donald R. Lehmann, 2013. "Digital Content Strategies," Working Papers 329, University of Zurich, Department of Business Administration (IBW).
    3. Euy-Young Jung & Chulwoo Baek & Jeong-Dong Lee, 2012. "Product survival analysis for the App Store," Marketing Letters, Springer, vol. 23(4), pages 929-941, December.
    4. Arne Katzmarzik, 2011. "Product Differentiation for Software-as-a-Service Providers," Business & Information Systems Engineering, Springer, vol. 3(1), pages 19-31, February.

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