Duopoly Pricing Strategy for Information Products with Premium Service: Free Product or Bundling?

Journal of Management Information Systems, (2016), Vol. 33, No. 1 pp. 260-295

41 Pages Posted: 30 Jun 2016 Last revised: 31 Aug 2016

See all articles by Zan Zhang

Zan Zhang

Beihang University (BUAA) - School of Economic and Management Science; Tianjin University - College of Management and Economics

Guofang Nan

Tianjin University - College of Management and Economics; Tianjin University

Minqiang Li

Tianjin University - College of Management and Economics

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: 2016

Abstract

Many software firms, especially mobile app providers, offer perpetually free basic products to users, but premiums are charged for access to the additional features or functionalities. While the free offering helps capture potential customers, it might cannibalize the sales of premium goods or services. This paper adopts a game theoretical approach to examine the impact of free offering on the competition between two firms in the presence of network effects. The firms can either offer a free core product and a paid service or offer them as a bundle. The core product has stand-alone value and can be used separately but the value-added service has no value without the core product. We derive the market equilibria and present conditions under which the free offering strategy outperforms the bundling strategy. We show that when a firm’s core product has a sufficient advantage in product quality, it is better for this firm to sell the bundle but for the other to use free strategy. However, if the core products are similar in terms of quality, it is optimal for them to use the same strategies. Whether to offer a free product depends largely on the core products’ quality. We also show that the firms may be caught in a prisoner’s dilemma when both adopt the free strategy. Finally, we find that the profitability of the firm that offers a free product always increases in network effects intensity and market size, but this is not the case for the firm that sells the bundle. This study contributes to understanding the behavior of feature-limited free offering in a duopoly setting. Our findings also provide insights into the design of free product and the impact of network effects on the firms’ offering decisions.

Keywords: free core product, freemium, information products, network effects, premium service, pricing, product bundling

Suggested Citation

Zhang, Zan and Nan, Guofang and Li, Minqiang and Tan, Yong, Duopoly Pricing Strategy for Information Products with Premium Service: Free Product or Bundling? (2016). Journal of Management Information Systems, (2016), Vol. 33, No. 1 pp. 260-295, Available at SSRN: https://ssrn.com/abstract=2801545

Zan Zhang (Contact Author)

Beihang University (BUAA) - School of Economic and Management Science ( email )

37 Xue Yuan Road
Beijing 100083
China

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Guofang Nan

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Tianjin University ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

Minqiang Li

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Yong Tan

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States

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