Product Strategy of a Software Company under the Network Effect and Soft ware Piracy

Abstract

This paper develops an analytical model, describing dynamics of interaction between software company and soft ware users at the market in the presence of pirated copies and network effect. This model is used to investigate an optimal software free trial strategy. Offering free trial version can be an effective strategy to promote the diffusion of experience goods, reduce piracy and increase revenues. Software users are aware of the true fit of software to their tastes only after consumption and piracy offers this consumption opportunity for them. Furthermore, due to network effect, the total value of soft ware to the user depends on total number of users of the soft ware. In such situation it can be can be profi table for soft ware company to offer free trial version besides the commercial one. Analysis of the model leads to a clear conclusion that on the early stages partial demand for commercial software can be cannibalized by free trial version, but it will lead to increase in
total users of the software and will eventually lead to total increase in demand and profit. Moreover, offering free trial versions can be considered as a tool to reduce piracy.

Keywords:

software market, software piracy, network effect, consumer behavior modeling