Pricing strategies for information products with network effects and complementary services in a duopolistic market

Biao Xu, Zhong Yao and Pengfei Tang

International Journal of Production Research, 2018, vol. 56, issue 12, 4243-4263

Abstract: In this paper, we model a fully covered duopoly market in which two firms offer a differentiated information product that exhibits positive network effects and a complementary premium service to consumers. For each firm, there are two marketing strategies: the freemium strategy and the bundling strategy. We find that, under the market equilibrium, a firms’ decision whether to employ the freemium strategy or not depends largely on the quality of the information product compared to its rival. When the information product quality is similar and the products’ intrinsic values are sufficiently large, both firms will be better off by adopting the freemium strategy, while the bundling strategy will prevail if the products’ intrinsic values are sufficiently small. Additionally, when the magnitude of complementary effects or network effects exceeds a given threshold, both firms’ profit can be enhanced by an increase in the degree of product complementarity or in the intensity of network effects. We also demonstrate that a firm can benefit from an increasing market size only if the intrinsic value of its information product is sufficiently large. Finally, we extend our model to the uncovered market and derive the equilibrium prices and profits.

Date: 2018
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Citations: View citations in EconPapers (9)

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DOI: 10.1080/00207543.2018.1425558

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