Optimal software strategies in the presence of network externalities

Network externalities or alternatively termed network effects are pervasive in computer software markets. While software vendors consider pricing strategies, they must also take into account the impact of network externalities on their sales. My main interest in this research is to describe a firm’s strategies and behaviors in the presence of network externalities and I look into three software strategy problems specifically—the free trial strategy problem, pricing strategy problem and compatibility strategy problem. In Chapter 2, I investigate the influence of network effects on the free trial strategies of a software firm under a monopoly scheme. I build an analytical model to examine the tradeoff between the effects of reduced uncertainty and demand cannibalization, and aim to uncover conditions under which software firms should introduce a time-locked free trial. I find that timelocked free trial outperforms the limited version free trial by bringing more profit to the software firm when consumers’ prior belief is low and the network effect intensity of the software is modest. In Chapter 3, I discuss a software firm’s optimal pricing strategies under the coalescing effect of piracy and word-of-mouth. I extend an empirical software diffusion model and find the optimal prices of a software product throughout its life cycle. In the settings of only one price change permitted, I show that a market penetration strategy dominates a skimming strategy when the demand of innovators is low, but loses ground and is replaced by the skimming pricing strategy as the demand of innovators increases. In Chapter 4, I examine the impact of network externalities on the competition between open source software (OSS) and proprietary software. I find that when the market is fully covered, the installed base and the profit of proprietary software increase at the expense of decreasing user base for OSS in the presence of network externalities. This competitive imbalance becomes more pronounced when a third product, commercially supported OSS, joins the competition. Furthermore, I find that OSS venders always have the most incentive to make its product compatible with proprietary software. (Full text of this dissertation may be available via the University of Florida Libraries web site. Please check http://www.uflib.ufl.edu/etd.html)