Abstract
AbstractIn software markets, pricing and openness interact to determine profitability through the direct effect of openness on feasible prices and costs, and their impact on different reinforcing feedback loops such as network effects. We develop a simulation model of the inner workings of a software firm, product life cycle and market aggregation, and analyze their interactions in a competitive market. The reinforcing loops increase the value of early market lead and put pressure on the competing firms to seek such advantage. The competitive equilibrium under strong reinforcing loops calls for highly open software products with early discounts that significantly compromise the profitability of the players. Proprietary platforms and higher prices are favored when those mechanisms are weak. We discuss the implications of this analysis for the dynamics of different competitive markets as well as the contributions to the system dynamics literature in analyzing Nash equilibrium of differential games. Copyright © 2012 System Dynamics Society.
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