Lock in and switch: Asymmetric information and new product diffusion
AbstractMany new web-based services are introduced as free services. Depending on the seller’s business model, some remain free in the long run, while others switch to pay mode at some point in time. I characterize the relation between buyers and a new service seller when the former are uncertain about the latter’s business model and need to incur a one-time sunk cost before enjoying the new service. I derive a natural signaling equilibrium where the seller plays a “lock-in-and-switch” strategy, while buyers play a “wait-and-see” strategy. Specifically, a high-cost seller starts by pricing at zero and waits for a sufficient number of consumers to adopt the new service, at which point the seller switches to pay mode. In this gradual separation equilibrium, the signal is given not by the price level (which always starts at zero) but rather by the duration of the introductory offer. Finally, I show the equilibrium entails diffusion even though consumers are identical and equally aware of the new service’s existence. Copyright Springer Science+Business Media, LLC 2012
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Bibliographic InfoArticle provided by Springer in its journal Quantitative Marketing and Economics.
Volume (Year): 10 (2012)
Issue (Month): 3 (September)
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Web page: http://www.springerlink.com/link.asp?id=111240
Diffusion; Asymmetric information; D11; D21; D82; L11; L12;
Find related papers by JEL classification:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
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