Analyzing Software as a Service with Per-Transaction Charges
Authors: Ma, Dan; Seidmann, Abraham
Journal: Information Systems Research (2015)
<jats:p> Software as a Service (SaaS) delivers a bundle of applications and services through the Web. Its on-demand feature allows users to enjoy full scalability and to handle possible demand fluctuations at no risk. In recent years, SaaS has become an appealing alternative to purchasing, installing, and maintaining modifiable off-the-shelf (MOTS) software packages. We present a game-theoretical model to study the competitive dynamics between the SaaS provider, who charges a variable per-transaction fee, and the traditional MOTS provider. We characterize the equilibrium conditions under which the two coexist in a competitive market and those under which each provider will fail and exit the market. Decreasing the lack-of-fit (or the cross-application data integration) costs of SaaS results in four structural regimes in the market. These are MOTS Dominance → Segmented Market → Competitive Market → SaaS Dominance. Based on our findings, we recommend distinct competitive strategies for each provider. We suggest that the SaaS provider should invest in reducing both its lack-of-fit costs and its per-transaction price so that it can offer increasing economies of scale. The MOTS provider…