Economics of Free Under Perpetual Licensing: Implications for the Software Industry
Authors: Niculescu, Marius F.; Wu, D. J.
Journal: Information Systems Research (2014)
<jats:p> In this paper, we explore the economics of free under perpetual licensing. In particular, we focus on two emerging software business models that involve a free component: feature-limited freemium (FLF) and uniform seeding (S). Under FLF, the firm offers the basic software version for free, while charging for premium features. Under S, the firm gives away for free the full product to a percentage of the addressable market uniformly across consumer types. We benchmark their performance against a conventional business model under which software is sold as a bundle (labeled as “charge for everything” or CE) without free offers. In the context of consumer bounded rationality and information asymmetry, we develop a unified two-period consumer valuation learning framework that accounts for both word-of-mouth (WOM) effects and experience-based learning, and use it to compare and contrast the three business models. Under both constant and dynamic pricing, for moderate strength of WOM signals, we derive the equilibria for each model and identify optimality regions. In particular, S is optimal when consumers significantly underestimate the value of functionality and cross-module syn…