Selling and Leasing Software with Network Externality

Jennifer Zhang () and Abraham Seidmann ()
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Jennifer Zhang: University of Toledo, http://www.businessfaculty.utoledo.edu/jzhang/
Abraham Seidmann: University of Rochester

No 06-13, Working Papers from NET Institute

Abstract: Previous studies suggested that a monopoly durable goods seller can use leasing to effectively avoid the time-inconsistent problem raised by Coase Conjecture. This paper extends those previous works by examining the monopoly seller’s selling and leasing strategy for a special type of durable good --- software. We look at a software vendor that can sell (at a posted price) or lease his product where as a lesser he guarantees that the lessees will always have the latest version of the software. We address some of the specific issues of implementing the selling and/or leasing policies at the packaged software market, including the impact of network externality, upgrade compatibility, and commitment on pricing in a dynamic environment. We show that by properly defining their pricing structure, software vendors can segment the market and second-degree price discriminate the consumers. We also demonstrate how software vendors can manage the trade-offs of selling and leasing to achieve a higher profit as well as the corresponding welfare effect on the consumers.

Keywords: Software licensing; Coarse Conjecture; Price discrimination; Network externality; Commitment; Upgrade; Compatibility; Risk. (search for similar items in EconPapers)
Pages: 36 pages
Date: 2006-09, Revised 2006-08
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt and nep-net
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