The Economics Of Free Trial For Software With Consideration Of Negative Security Externalities

The freemium model has been increasingly embraced by software vendors,due to software's characteristics of low marginal cost and high network externality.Existing literature on the freemium strategy mainly focuses on balancing the trade-off between positive network effect and the cannibalization effect,it's profitable for the vendor to offer a freeware only if the network effect is strong.Nevertheless,a vendor has to take into account the negative security risks caused by the freeware users and choose a patching strategy accordingly.A two-stage decision problem faced with a software vendor is examined which involves a freemium strategy and a subsequent patching strategy considering both the positive network effect and the negative security externality effect.We adopt a backward induction fashion to solve the problem: First,we model and compare three alternative patching strategies:?i?patching for all users without charge?PS₁?;?ii?patching for freeware users with charge?PS₂?;?iii?patching for commercial users only?PS₃?.By doing so,we discuss the optimal patching strategy under different conditions.Then,we show that it is profitable for the software vendor to adopt a freemium model under a moderate or high positive network effect when the optimal patching strategy is adopted.With a higher negative security externality,the vendor has more incentive to allow the freeware users to patch.Besides,offering a freeware improves the social welfare,however,both the vendor's optimal profit and the maximum social welfare can be achieved only if the vendor adopts the patching strategy PS₁ under a high positive network effect.The main contribution of this research is as follows,we make the theory research on freemium pricing model more perfect via taking the negative security externality into account,and it's helpful for the software vendor when making the freemium decision.