When Should Software Firms Commercialize New Products ... - MISRC

while, under TLF, all low-type consumers get to use B in the first period. Given the large
difference between the values of modules A and B, social welfare is maximized under TLF
in this region.
For all the feasible parameter combinations, under a profit maximizing firm, we dis-
cussed in Theorems 1 and 2 which strategies yield the highest profit and the highest social
welfare, respectively. We conclude this section by exploring opportunities for policy adjust-
ments (e.g., subsidies) aimed towards aligning the firm’s and the society’s interests. We
depict in Figure 4 regions whereaprofitmaximizing firm ends up choosing the strategy that
actually yields the highest social welfare among CE, FLF, and TLF (we already know that
SS and CS are dominated under both profit and social welfare). First, part (a) of Theorem
2 shows that it is always desirable from a social standpoint for the firm to switch from a
baseline CE model to a freemium model. Where CE is optimal for the firm, the highest
social welfare is achieved under FLF or TLF depending on the values of γ and αb +δb, as
illustrated in part (b) of Theorem 2. Second, when the firm chooses FLF, that strategy
can yield the highest social welfare if and only if γ ≤ 1 (panels A.i, A.ii, and B.i of Figure
4), i.e., when value added through module B is less than the value of module A. This case
may correspond to scenarios where the firm offers a general multi-purpose platform product
(module A) and allows users to purchase additional very specialized functionality separately
(module B) which, on average, brings less benefits to users compared to the platform itself.
Otherwise, social welfare can be increased by employing TLF in this region (panels A.iii,
A.iv, and B.ii of Figure 4). Third, when the firm chooses TLF, that approach can be
socially optimal only when αa ≤ γ+1
2 and γ > 1 1
3 . When γ ≤ 3 , FLF is socially optimal.
When 1 1
3 < γ <
7−8φ(13−4 √ , FLF becomes less socially desirable as firm’s optimal choice
10)
(TLF) becomes socially better first for low αb+δb (Panel A.ii of Figure 4) and then also for
1
high enough αb + δb (panel A.iii of Figure 4). Ultimately, when
7−8φ(13−4 √ ≤ γ (panel
10)
A.iv of Figure 4), firm’s optimal TLF choice is socially optimal for all αb + δb < 1 1
2 + 2γ .
Last, it is particularly interesting to note that when αa ≥ γ+1
2 and γ > 1 the firm never
chooses the strategy that maximizes the social welfare (TLF). In this scenario the firmdoes
not want under any circumstance to invest into fully informing consumers about the true
value of the product by completely forfeiting period 1 sales. This, in turn, may prompt the
government to subsidize the firm in order to incentivize it to switch to TLF, thus educating
customers about the product benefits.
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