Trial and Pricing Strategies of Software Market with Competition and Network Effects

Abstract

In this paper, we develop a framework to generally characterize the equilibrium trial and pricing strategies of oligopoly software market, when there exist competition, network effects (externalities), uncertainty on software functionality, network maintaining cost and compatibility issues. We find that, in equilibrium, the restriction on network effects is decreasing with network effects, but increasing with consumers’ basic willingness to pay. Meanwhile, the restriction on functionality is increasing with the posterior on the functionality after trial. The equilibrium price has a non-linear relation with the equilibrium network effects in a monopoly market and a market with completely incompatible software. However, the equilibrium price is set to maintaining cost in a market with completely compatible software. Moreover, we find that incompatibility could generate an equilibrium under which identical firms choose different trial and pricing strategies, and all consumers who want to purchase software are divided by firms on the market.