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

  • Cheng, Hsing Kenneth
  • Tang, Qian Candy
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    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/pii/S0377-2217(10)00022-6
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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    1. Kathleen Reavis Conner & Richard P. Rumelt, 1991. "Software Piracy: An Analysis of Protection Strategies," Management Science, INFORMS, vol. 37(2), pages 125-139, February.
    2. Ernan Haruvy & Ashutosh Prasad, 2001. "Optimal freeware quality in the presence of network externalities: an evolutionary game theoretical approach," Journal of Evolutionary Economics, Springer, vol. 11(2), pages 231-248.
    3. SHY, Oz & THISSE, Jacques-François, . "A strategic approach to software protection," CORE Discussion Papers RP 1413, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
    5. Erik Brynjolfsson & Chris F. Kemerer, 1993. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Working Paper Series 158, MIT Center for Coordination Science.
    6. Haruvy, Ernan & Prasad, Ashutosh, 1998. "Optimal product strategies in the presence of network externalities," Information Economics and Policy, Elsevier, vol. 10(4), pages 489-499, December.
    7. Kathleen R. Conner, 1995. "Obtaining Strategic Advantage from Being Imitated: When Can Encouraging "Clones" Pay?," Management Science, INFORMS, vol. 41(2), pages 209-225, February.
    8. Takeyama, Lisa N, 1994. "The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 155-66, June.
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