An agent-based model to study the market dynamics of perpetual and subscription licensing

This paper examines the market dynamics between two competing pricing strategies through an agent-based simulation model. Specifically, this study is inspired by the rising popularity of the subscription licensing strategy in software industry, which offers many advantages over the traditional fixed-fee perpetual licensing strategy. However, it remains unclear under what conditions a firm implementing the subscription licensing strategy will win the market over its competitors practising the fixed-fee perpetual licensing strategy. Using an agent-based model, we simulate two types of firms that are developing and selling two similar products or services to a fixed number of heterogeneous customers with the aforementioned two different pricing strategies. An individual customer chooses a product or service based on his or her own preference as well as the product’s price and performance. Firms spend a percentage of the accumulated revenue on research and development to improve the product or service’s performance. Simulation results suggest that there is a narrow window for the subscription licensing strategy to beat the traditional perpetual licensing strategy, especially when a large customer base is already established with the perpetual licensing strategy.

[1]  Joseph Farrell,et al.  Converters, Compatibility, and the Control of Interfaces , 2015 .

[2]  Fernando F. Suarez,et al.  The Half-Truth of First-Mover Advantage , 2005, Harvard business review.

[3]  Christoph Zott,et al.  DYNAMIC CAPABILITIES AND THE EMERGENCE OF INTRAINDUSTRY DIFFERENTIAL FIRM PERFORMANCE: INSIGHTS FROM A SIMULATION STUDY , 2003 .

[4]  Richard Makadok.  Can first-mover and early-mover advantages be sustained in an industry with low barriers to entry/imitation? , 1998 .

[5]  Hans Wortmann,et al.  An economic model to compare the profitability of pay-per-use and fixed-fee licensing , 2009, Inf. Softw. Technol..

[6]  Yikuan Lee,et al.  New product launch strategy for network effects products , 2003 .

[7]  Marvin A. Sirbu,et al.  Price Competition and Compatibility in the Presence of Positive Demand Externalities , 1995 .

[8]  Kathleen M. Eisenhardt,et al.  Developing Theory Through Simulation Methods , 2006 .

[9]  D. North.  Competing Technologies , Increasing Returns , and Lock-In by Historical Events , 1994 .

[10]  Jongseok Lee,et al.  Exploration and Exploitation in the Presence of Network Externalities , 2003, Manag. Sci..

[11]  Pei-yu Chen,et al.  Software Licensing: Pay-Per-Use versus Perpetual , 2007 .

[12]  C. Chu,et al.  Sale or Lease? Durable-Goods Monopoly with Network Effects , 2008, Mark. Sci..

[13]  Duncan J. Watts,et al.  Collective dynamics of ‘small-world’ networks , 1998, Nature.

[14]  Perpetual Licensing vs. Subscription of Software: A Theoretical Evaluation , 2009 .

[15]  Abraham Seidmann,et al.  Perpetual Licensing vs. Subscription of Software: A Theoretical Evaluation , 2009, 2009 42nd Hawaii International Conference on System Sciences.

[16]  April M. Franco,et al.  Swift and Smart: The Moderating Effects of Technological Capabilities on the Market Pioneering-Firm Survival Relationship , 2009, Manag. Sci..

[17]  P. Kotler.  Reconceptualizing marketing: An interview with Philip Kotler , 1994 .

[18]  Daniel A. Levinthal,et al.  Exploration and Exploitation in Organizational Learning , 2007 .

[19]  Susan J. Winter,et al.  New product pricing strategies for network effects products: free products? , 2010 .