Time-locked free trial strategy in duopoly markets with switching costs

Haiping Wang, Jun Lin () and Lun Ran
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Haiping Wang: Beijing Institute of Technology
Jun Lin: Xi’an Jiaotong University
Lun Ran: Beijing Institute of Technology

4OR, 2023, vol. 21, issue 4, No 4, 639-681

Abstract: Abstract Offering time-locked free trials is a common strategy in the software industry. Pioneering studies have mainly focused on time-locked free trial strategies in monopoly markets, and acknowledged that an overall positive effect on consumers’ WTP is a prerequisite for offering free trials. However, software markets are often competitive, and consumers typically follow a Bayesian learning principle. We develop a game-theoretic model to examine time-locked free trial strategies in duopoly markets with switching costs. The results show that, in the markets with small switching costs, firms pursue opposite free trial strategies when the horizontal difference between products is small, and neither offers otherwise. If the switching costs are larger than a threshold, then both firms offer free trials when the horizontal difference between products is moderate. We further demonstrate that in the presence of functionality heterogeneity between products, firms are unable to reach an equilibrium in some specific cases, and more likely to take opposite free trial strategies in equilibrium. Moreover, if the firms do choose opposite strategies, interestingly, the firm with superior product does not offer free trials when switching costs are low, and is more willing to offer as switching costs increase. Our results are robust to the inclusion of other factors in the model, such as the possibility of consumers trying only one product, correlated consumer learning across different products, consumer heterogeneity in usage time, and network effects.

Keywords: Pricing; Free trial; Switching cost; Consumer learning; Network effects; 90-02; 90B60; 91-02; 91B24 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10288-023-00532-w

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