Pricing strategies for information products with network effects

What is it about?

In this paper, we model a 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 what condition the firm prefer to the freemium strategy or bundling strategy. Specifically, 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.

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Why is it important?

Management should know that the marketing strategy of information product and service is different with the physical goods like computer, mobile phone,and food, et al. When the information product quality is similar and the products’ intrinsic values are sufficiently large, firms will be better off by adopting the freemium strategy, while the bundling strategy will prevail if the products’ intrinsic values are sufficiently small. On the other hand, some information product is of a network externality, this externality has impacted on pricing strategy of firms when it reach to some threshold. More than the threshold of the externality, both firms’ profit can be enhanced by an increase in the degree of product complementarity or in the intensity of network effects.

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