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A Cost-Benefit-Based Analytical Model for Finding the Optimal Offering of Software Services

Author

Listed:
  • Khin Swe Latt

    ()

  • Jorn Altmann

    () (Technology Management, Economics, and Policy Program (TEMEP), Seoul National University)

Abstract

In this paper, we introduce an analytical model for maximizing social welfare, which can be used for finding the optimal offering of a set of software services. The analytical model also explains the impact of service flexibility on customer¡¯s selection of business services and on the revenue of service providers. The analytical model is based on a utility model and a cost model. The cost model uses the number of lines of code as the basic measure for cost and applies linear and polynomial cost functions. The utility model is derived from a customer-provider relationship model, which relates the user¡¯s utility to the functionality of business services. The result of the analytical model shows that the distribution of functions of an existing business service to a large number of new business services does not generate any additional revenues for the service provider from existing customers. Instead, additional revenue is generated through the offering of business services with fewer functions at lower price. This business services attract customers, which could not afford the original software service of the provider. The result of the analytical model also shows that there is an optimal number of business services that maximizes the net utility of customers.

Suggested Citation

  • Khin Swe Latt & Jorn Altmann, 2010. "A Cost-Benefit-Based Analytical Model for Finding the Optimal Offering of Software Services," TEMEP Discussion Papers 201070, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Dec 2010.
  • Handle: RePEc:snv:dp2009:201070
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    File URL: ftp://147.46.237.98/DP-70.pdf
    File Function: First version, 2010
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    References listed on IDEAS

    as
    1. Juthasit Rohitratana & Jorn Altmann, 2010. "Agent-Based Simulations of the Software Market under Different Pricing Schemes for Software-as-a-Service and Perpetual Software," TEMEP Discussion Papers 201064, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Jul 2010.
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    Cited by:

    1. Christoph Dorsch, 2015. "On the Sound Financial Valuation of Flexibility in Information Systems," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 57(2), pages 115-127, April.

    More about this item

    Keywords

    Service-oriented architectures; economics of digital products; business process analysis; business service; customer satisfaction model; software services; service science; customer preferences; social welfare maximization and profit maximization of software service development; cost modeling; economics of service decomposition and service composition.;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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