Optimal pricing for new product entry under free strategy

A growing number of firms in software industry are embracing free entry strategy to promote product adoption. The prevalence of free strategy can be partly attributed to the positive network externalities exhibited by the information goods. In this paper, we model a new firm's entry into an existing market with the free strategy. Consumers can use the new product's basic functionality for free and pay a subscription fee for accessing the add-ons. The entrant firm's new product infringes on the market in one of the three ways: homogeneous product competition, high-end encroachment and low-end encroachment. We find that the equilibrium market structure varies across the three settings. In particular, there exists a Bertrand equilibrium when the new firm provides a homogeneous product. When the new firm offers a heterogeneous product, our results show that the network externalities intensify the price competition and thus lead to a reduction in the profits. Moreover, whether the new firm should encroach on the existing market with high-end product or low-end product depends on the level of switching cost. If the switching cost is low, the new firm will benefit more from high-end encroachment and vice versa. We also find that it is not always optimal for the new firm to adopt the free entry strategy. In the high-end encroachment, the new firm will be better off providing a product for free if the network intensity is high enough, whereas in the low-end encroachment, the free strategy is dominant only when the network intensity falls within a given threshold.

软件行业中越来越多的公司正在采用免费进入策略来促进产品的采用。免费策略的盛行部分可归因于信息商品所呈现的正网络外部性。在本文中，我们对一家新公司采用免费策略进入现有市场进行了建模。消费者可以免费使用新产品的基本功能，并为获取附加组件支付订阅费用。进入企业的新产品以下列三种方式之一侵入市场：同质产品竞争、高端侵占和低端侵占。我们发现，均衡市场结构在这三种情况下各不相同。特别是，当新公司提供同质产品时，存在伯特兰均衡。当新公司提供异质产品时，我们的结果表明，网络外部性加剧了价格竞争，从而导致利润减少。此外，新公司应该用高端产品还是低端产品侵入现有市场取决于转换成本的水平。如果转换成本较低，新公司将从高端侵占中获益更多，反之亦然。我们还发现，新公司采用免费进入策略并不总是最优的。在高端侵占中，如果网络强度足够高，新公司免费提供产品会更好，而在低端侵占中，只有当网络强度在给定阈值内时，免费策略才占主导地位。