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Selling and Leasing Software with Network Externality

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Abstract

Previous studies suggested that a monopoly durable goods seller can use leasing to effectively avoid the time-inconsistent problem raised by Coase Conjecture. This paper extends those previous works by examining the monopoly seller’s selling and leasing strategy for a special type of durable good --- software. We look at a software vendor that can sell (at a posted price) or lease his product where as a lesser he guarantees that the lessees will always have the latest version of the software. We address some of the specific issues of implementing the selling and/or leasing policies at the packaged software market, including the impact of network externality, upgrade compatibility, and commitment on pricing in a dynamic environment. We show that by properly defining their pricing structure, software vendors can segment the market and second-degree price discriminate the consumers. We also demonstrate how software vendors can manage the trade-offs of selling and leasing to achieve a higher profit as well as the corresponding welfare effect on the consumers.

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  • Jennifer Zhang & Abraham Seidmann, 2006. "Selling and Leasing Software with Network Externality," Working Papers 06-13, NET Institute, revised Aug 2006.
  • Handle: RePEc:net:wpaper:0613
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    1. Sam Bucovetsky & John Chilton, 1986. "Concurrent Renting and Selling in a Durable-Goods Monopoly under Threat of Entry," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 261-275, Summer.
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    More about this item

    Keywords

    Software licensing; Coarse Conjecture; Price discrimination; Network externality; Commitment; Upgrade; Compatibility; Risk.;
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