Effects of Quality Improvement and Upgrading on Software Market Disruption

Effects of Quality Improvement and Upgrading on Software Market Disruption

Evangelos Katsamakas (Gabelli School of Business, Fordham University, New York, USA)
Copyright: © 2018 |Pages: 15
DOI: 10.4018/IJSDS.2018100101

Abstract

Digital goods, such as software, are significant elements of the contemporary digital economy. The authors propose a model that characterizes dynamic profit-maximizing competitive pricing strategies of digital goods with network effects. In a two-period game theory model, an incumbent firm has a quality advantage in period 1, but the potential disrupter has a quality advantage in period 2. They analyze pricing strategies and characterize conditions under which the potential disrupter becomes an actual disrupter. They discuss implications for user adoption of digital goods and opportunities for future research.
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2. Background

Earlier research closest to our model is the work on dynamic competitive adoption of technologies with network externalities (Katz & Shapiro, 1986). That paper considered a two period setting with two technologies, in which the old technology has a first period marginal production-cost advantage, while the new technology has a second period marginal production-cost advantage. The main goal of the paper was to analyze how technology sponsorship matters. We modify and extent that framework to analyze dynamic competitive adoption in the software industry.

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