Impact of consumer valuation updating in a competitive software market

Abstract

Software is an experiential product, and it is difficult for consumers to predict whether software matches their preferences before using it. The software vendor usually upgrades software based on the previous version, which is an effective way for existing consumers to find their true valuation. This paper considers a competitive software market with an incumbent and an entrant. Consumers who have experienced the incumbent's previous version of the software can alleviate their uncertainty about the incumbent's upgraded version, while they are uninformed about the entrant's software. This study constructs two scenarios with and without consumer valuation updating under the environment of consumers’ valuation uncertainty. We explore the optimal pricing decisions and market structure in a competitive market, and the impacts of signal accuracy on market structure and software vendors’ profits. Further, we compare the two scenarios to analyze the effects of consumers’ valuation updating. We find that in the scenario with consumer valuation updating, there are three equilibrium outcomes: Market Segmentation Equilibrium, Incumbent Dominance Equilibrium, and Entry Deterrence Equilibrium. In addition, the results show that improved signal accuracy can enlarge the region of Entry Deterrence Equilibrium under certain conditions, but does not always increase the incumbent's profit. Furthermore, we find that consumers’ valuation updating of the incumbent's upgraded version leads to a stronger willingness of the incumbent to share the market with the entrant. We also show that the incumbent and the entrant can achieve a win‒win situation in the scenario with consumers’ valuation updating.