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Lock in and switch: Asymmetric information and new product diffusion

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  • Luís Cabral

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Abstract

Many 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 Info

Article provided by Springer in its journal Quantitative Marketing and Economics.

Volume (Year): 10 (2012)
Issue (Month): 3 (September)
Pages: 375-392

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Handle: RePEc:kap:qmktec:v:10:y:2012:i:3:p:375-392

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Web page: http://www.springerlink.com/link.asp?id=111240

Related research

Keywords: Diffusion; Asymmetric information; D11; D21; D82; L11; L12;

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Cited by:
  1. K. Sudhir & Nathan Yang, 2014. "Exploiting the Choice-Consumption Mismatch: A New Approach to Disentangle State Dependence and Heterogeneity," Cowles Foundation Discussion Papers 1941, Cowles Foundation for Research in Economics, Yale University.

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