Pricing strategies for information products with network effects and complementary services in a duopolistic market

Abstract

In this paper, we model a fully covered duopoly market in which two firms offer a differentiated information product that exhibits positive network effects and a complementary premium service to consumers. For each firm, there are two marketing strategies: the freemium strategy and the bundling strategy. We find that, under the market equilibrium, a firms’ decision whether to employ the freemium strategy or not depends largely on the quality of the information product compared to its rival. When the information product quality is similar and the products’ intrinsic values are sufficiently large, both firms will be better off by adopting the freemium strategy, while the bundling strategy will prevail if the products’ intrinsic values are sufficiently small. Additionally, when the magnitude of complementary effects or network effects exceeds a given threshold, both firms’ profit can be enhanced by an increase in the degree of product complementarity or in the intensity of network effects. We also demonstrate that a firm can benefit from an increasing market size only if the intrinsic value of its information product is sufficiently large. Finally, we extend our model to the uncovered market and derive the equilibrium prices and profits.

Keywords:

• freemium products
• premium service
• bundling
• product complementarity
• network effects
• duopolistic market

Acknowledgements

The authors would like to thank the anonymous reviewers, the Associate Editor and the Editor for very detailed and helpful comments and suggestions on this work.

Notes

1. This paper analyses cases where the premium service is uniform in quality for both firms. An alternative formulation is to add vertical differentiation by assuming that the service has different intrinsic values (e.g. V _s1 and V _s2) for both firms. This model can be analysed in a similar way, but the analysis becomes unnecessarily complicated and the main insights remain unchanged. We also acknowledge that a firm may provide a premium service that is horizontally differentiated; however, it is beyond the scope of this paper. Special thanks to an anonymous reviewer for suggesting this statement.

2. We make this assumption by considering that the same quality provision has the same marginal cost. A similar type of assumption can be found in Gabszewicz and Thisse (1979) and Etzion and Pang (2014).

3. We thank an anonymous reviewer for bringing this interpretation to our attention.