Network externalities are commonly observed in many markets in e-commerce, especially in the software market. Many software firms provide free-version products to attract consumers. In this paper, we build a discrete-time dynamical system to investigate why software providers choose to offer commercial versions of products as well as free versions when network externalities are present. We first propose a monopoly model, and then build a duopoly model with two competitors, and one of whom doesn’t adopt free-version strategy. Simulation results verify that the presence of network externalities induces firms to provide free-version products.
Feng, Haiyang and Li, Minqiang, "Offering Free Version Sofaware Products in the Presence of Network Externalities in E-Commerce" (2010). ICEB 2010 Proceedings. 78.