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

  • Zhenhua Wu
  • Zhijie LinEmail author
  • Yong Tan
Conference paper
Part of the Lecture Notes in Business Information Processing book series (LNBIP, volume 328)


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.


Software trial Pricing Market competition Network effects Compatibility 


  1. Amir Heiman, E.M.: Using demonstration to increase new product acceptance: controlling demonstration time. J. Market. Res. 33(4), 422–430 (1996)CrossRefGoogle Scholar
  2. Bawa, K., Shoemaker, R.: The effects of free sample promotions on incremental brand sales. Market. Sci. 23(3), 345–363 (2004)CrossRefGoogle Scholar
  3. Brynjolfsson, E., Kemerer, C.F.: Network externalities in microcomputer software: an econometric analysis of the spreadsheet market. Manage. Sci. 42(12), 1627–1647 (1996)CrossRefGoogle Scholar
  4. Cheng, H.K., Liu, Y.: Optimal software free trial strategy: the impact of network externalities and consumer uncertainty. Inf. Syst. Res. 23(2), 488–504 (2012)CrossRefGoogle Scholar
  5. Cheng, H.K., Tang, Q.C.: Free trial or no free trial: optimal software product design with network effects. Eur. J. Oper. Res. 205(2), 437–447 (2010)CrossRefGoogle Scholar
  6. Dey, D., Lahiri, A., Liu, D.: Consumer learning and time-locked trials of software products. J. Manag. Inf. Syst. 30(2), 239–268 (2013)CrossRefGoogle Scholar
  7. Economides, N.: The economics of networks. Int. J. Ind. Organ. 14(6), 673–699 (1996)CrossRefGoogle Scholar
  8. Economides, N., Katsamakas, E.: Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry. Manage. Sci. 52(7), 1057–1071 (2006)CrossRefGoogle Scholar
  9. Goering, P.A.: Effects of product trial on consumer expectations, demand, and prices. J. Consum. Res. 12(1), 74–82 (1985)CrossRefGoogle Scholar
  10. Heiman, A., McWilliams, B., Shen, Z., Zilberman, D.: Learning and forgetting: modeling optimal product sampling over time. Manage. Sci. 47(4), 532–546 (2001)CrossRefGoogle Scholar
  11. Katz, M., Shapiro, C.: Network externalities, competition, and compatibility. Am. Econ. Rev. 75(3), 424–440 (1985)Google Scholar
  12. Lee, Y.-J., Tan, Y.: Effects of different types of free trials and ratings in sampling of consumer software: An empirical study. J. Manage. Inf. Syst. 30(3), 213–246 (2013)CrossRefGoogle Scholar
  13. Niculescu, M.F., Wu, D.J.: Economics of free under perpetual licensing: Implications for the software industry. Inf. Syst. Res. 25(1), 173–199 (2014)CrossRefGoogle Scholar
  14. Sen, R.: A strategic analysis of competition between open source and proprietary software. J. Manage. Inf. Syst. 24(1), 233–257 (2007)CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2018

Authors and Affiliations

  1. 1.School of ManagementNanjing UniversityNanjingChina
  2. 2.Foster School of Business University of WashingtonSeattleUSA

Personalised recommendations