Product Line Extension in Consumer Software Markets in the Presence of Free Alternatives (New)

Aaron Baird, Georgia State University,
Chadwick Miller, Washington State University
T. S. Raghu, Arizona State University
Rajiv K. Sinha, Arizona State University

The current environment faced by incumbents in the software industry is hyper-competitive. Not only do these organizations face high piracy rates (a 2011 study found that 50% of computer users admitted to pirating software), but they also must compete with widely available free alternatives. In this research, the authors investigate ways that incumbents can use piracy controls and vertical product extensions to maximize consumers’ willingness to pay for a focal software product. In two controlled experiments, using a unique willingness to pay (WTP) elicitation method, the authors show that introducing a premium or free vertical product extension has different impacts on consumers’ WTP for the focal product depending on whether it is a low- or high- cost market. However, piracy controls reduce the piracy rate but have a limited impact on consumers’ WTP for the focal product in both contexts. The insight for management: We observed that the highest WTP occurred with (1) virtually no piracy controls associated with the target product in a high or low-cost market, (2) the introduction of a free product extension in the high-cost market, and (3) the introduction of a premium product extension in the low-cost market.

 

Baird, A., Miller C., Raghu, T. S., Sinha, R. K., “Product Line Extension in Consumer Software Markets in the Presence of Free Alternatives.” Information Systems Research (forthcoming).