Effects of Quality Improvement and Upgrading on Software Market Disruption

Abstract

Digital goods, such as software, are significant elements of the contemporary digital economy. The authors propose a model that characterizes dynamic profit-maximizing competitive pricing strategies of digital goods with network effects. In a two-period game theory model, an incumbent firm has a quality advantage in period 1, but the potential disrupter has a quality advantage in period 2. They analyze pricing strategies and characterize conditions under which the potential disrupter becomes an actual disrupter. They discuss implications for user adoption of digital goods and opportunities for future research.