Vidyanand Choudhary

Comparison of Software Quality Under Perpetual Licensing and Software as a Service

Software is available through a number of different licensing models such as the commonly used perpetual licensing model and a relatively new licensing model called software as a service (SaaS). There are several differences between SaaS and perpetual licensing. SaaS licensing offers software using a subscription model, whereas perpetual licensing involves a one-time payment for a perpetual use license and optional additional payments for future upgrades. Prior literature has not considered the impact of these licensing schemes on the publishers incentive to invest in software quality. We model differences in how new software features are disseminated in SaaS and perpetual licensing. We show that these differences affect the publishers incentive to invest in product development. We find that the SaaS licensing model leads to greater investment in product development under most conditions. This increased investment leads to higher software quality in equilibrium under SaaS as compared to perpetual licensing. The software publisher earns greater profits and social welfare is higher under SaaS under these conditions.

Information Goods and Vertical Differentiation

Second-degree price discrimination, that is, vertical differentiation, is widely practiced by firms selling physical goods to consumers with heterogeneous valuations. This strategy leads to market segmentation and has been shown to be optimal by many researchers. On the other hand, researchers have also demonstrated, under certain restrictive conditions, that vertical differentiation may not be optimal for information goods. We analyze vertical differentiation for a monopolist, continuing the practice of modeling consumer valuation as a linear function of product quality and consumer type but generalizing assumptions about marginal costs and consumer distributions. We show that the firms optimal product line depends on the benefit-to-cost ratio of qualities in the choice vector. We find that a vertical differentiation strategy is not optimal when the highest quality product has the best benefitto-cost ratio. Many information goods satisfy this property.

Software as a Service: Implications for Investment in Software Development

Software as a service (SaaS) is a rapidly growing model of software licensing. In contrast to traditional software where users buy a perpetual-use license, SaaS users buy a subscription from the publisher. Whereas traditional software publishers typically release new product features as part of new versions of software once in a few years, publishers using SaaS have an incentive to release new features as soon as they are completed. We show that this property of the SaaS licensing model leads to greater investment in product development under most conditions. This increased investment leads to higher software quality in equilibrium under SaaS compared to perpetual licensing. The software publisher earns greater profits under SaaS while social welfare is also higher

Economics of an Information Intermediary with Aggregation Benefits

The widespread use of the Internet has led to the emergence of numerous information intermediaries that bring buyers and sellers together and leverage their knowledge of the marketplace to provide value-added services. Infomediaries offer matching services that facilitate establishment of a buyer-seller agreement, and value-added services that either provide a standalone benefit or enhance benefits from matching services. This paper develops and analyzes economic models of intermediaries to examine their pricing and product line design strategies. Intermediaries provide aggregation benefits: Buyers find an intermediarys service more valuable if it provides access to more sellers, and sellers value it more if it provides access to more buyers, but also when they compete with fewer sellers. Due to this unique combination of network effects, we find that an intermediary has stronger incentives to provide quality-differentiated versions of its service relative to other information goods sellers. When buyers have constant marginal valuations for service quality, the intermediary should offer only two levels of service. While it is optimal for the intermediary to offer two levels of service, increasing the quality of the low-level service reduces the intermediarys profits due to increased cannibalization of the premium service. Hence, the optimal menu consists of a basic matching service and a premium service that includes matching and value-added services. The intermediarys profits are larger when positive network effects are stronger, and lower when negative network effects are stronger.

Research Note---When Is Versioning Optimal for Information Goods?

This paper provides insights about when versioning is an optimal strategy for information goods. Our characterization of this class of goods is that variable costs are invariant with quality, including the special case of zero variable costs. Our analysis assumes a monopoly firm that has an existing product in the market and has an opportunity to segment the market by introducing additional lower-quality versions. We derive a simple decision rule for determining the optimality of versioning based on the solution to a single-product maximization problem. Versioning is optimal when the optimal market share of the lower-quality version, offered alone, is greater than the optimal market share of the high-quality version, offered alone. A firm can profitably employ versioning for an information good if it can design the lower quality in a way that, relative to their valuations for the high-end version, high-type consumers have a lower relative valuation for the lower quality than do low-type consumers. When variable costs increase, a firm that offered only one product version need not consider adding another version. When variable costs decrease, the firm should explore adding a lower-quality version.

The Impact of Cloud Computing: Should the IT Department Be Organized as a Cost Center or a Profit Center?

How does the adoption of cloud computing by a firm affect the organizational structure of its information technology (IT) department? To analyze this question, we consider an IT department that procures IT services from a cloud computing vendor and enhances these services for consuming units within the firm. Our model incorporates the competitive environment faced by the cloud vendor, which affects the price of the cloud vendor. We find that when the cloud vendor faces intense competition, the cost-center organizational model is preferred over the profit-center model. Infrastructure services such as basic storage, e-mail, and raw computing face intense competition, and our results suggest that such services be offered as a free corporate resource under the cost-center organizational structure. When the cloud vendor has pricing power, a profit-center organizational structure is likely to be preferred. Our results suggest that highly differentiated services such as cloud-based enterprise-wide enterprise resource planning or business intelligence be offered under the profit-center structure. Finally, the profit-center structure provides greater internal quality enhancement to cloud-based IT services than the cost center.

A Model of Neutral B2B Intermediaries

Business-to-business (B2B) electronic commerce has become an important issue in the debate about electronic commerce. How should the intermediary charge suppliers and buyers to maximize profits from such a marketplace? We analyze a monopolistic B2B marketplace owned by an independent intermediary. The marketplace exhibits two-sided network effects where the value of the marketplace to buyers is dependent on the number of suppliers, and the value to suppliers is dependent on the number of buyers and suppliers. When these two-sided network effects exist, we find that the optimal price for buyers and the fraction of buyers in the electronic market are dependent on the switching cost and the strength of the network effect of both types: buyers and suppliers. The same is true for the optimal price for suppliers and the fraction of suppliers in the electronic market. In other words, the parameters that define the buyers also affect the optimal price for suppliers and the fraction of suppliers in the electronic market, and vice versa. Our results also point to some counterintuitive optimal pricing strategies that depend on the nature of the industry served by the marketplace.

Pricing and Product Design: Intermediary Strategies in an Electronic Market

Electronic intermediaries play an important role in many Web-based electronic markets, adding value for participants by offering such services as matchmaking and trust. This paper presents an economic model of intermediation where the intermediary offers services to two types of actors: consumers and providers. When consumers are heterogeneous, differentiated by their willingness to pay for intermediation, the intermediary can potentially offer two (or more) levels of service quality to target different consumer segments. The analysis in this paper highlights the aggregation benefit that consumers derive from having access to multiple providers through the intermediary. According to prior research on vertically differentiated digital goods, it is optimal to offer only one quality level in the market, because segmentation causes cannibalization and lowers profits. In the case of intermediation, however, the aggregation benefit makes it optimal for the intermediary to offer both levels of service. The intermediarys profits increase when the quality of the lower-quality service is decreased, suggesting that the two quality levels should be differentiated as much as possible. If the aggregation effect is intense, the intermediary should make the service free for providers.

Economic Benefits of Renting Software

In this article, we analyze the economics of a monopoly firm selling and renting a packaged software product by employing an intertemporal monopoly pricing game to model the firms pricing strategy. The game models the software product as two versions; the first version is available in the first period and the second, a revised version, is available in the second period. The second version benefits from consumer reports of bugs and requests for additional features. This is modeled using delayed network externalities that take effect only in the second period. We observe that the introduction of the rental product in the first period leads to an increase in profits. We also find that the firms profits are monotonically increasing with the intensity of the network effect. As the intensity of the network effect becomes stronger, the firm chooses to reduce its prices in the first period to expand the size of its network and later increases prices in the second period. Because many of the customers who choose...

Electronic B2B Marketplaces with Different Ownership Structures

This paper analyzes electronic marketplaces with different ownership structures: biased marketplaces and neutral marketplaces. Biased marketplaces can be either buyer-owned or supplier-owned, whereas neutral marketplaces are owned by independent third parties. We develop a single-period model, with fulfilled expectations equilibrium. The buyers experience positive network effects that are a function of the number of suppliers and the suppliers receive similar positive network effects depending on the number of buyers. We develop a general model with atomistic buyers and suppliers. We find that biased marketplaces set prices to induce greater participation (demand) from both buyers and suppliers compared to a neutral marketplace. This counterintuitive result can be understood in the context of the positive cross-network effects experienced by buyers and suppliers and the added benefit to the owner of a biased marketplace from participating in the marketplace. Biased marketplaces also provide greater social welfare compared to neutral marketplaces.