Abstract:

We use a microeconomic modeling approach to analyze the shareware marketing strategy in a
monopolistic setting. We analyze and compare two types of shareware use restriction: (1) time
limitation and (2) functionality limitation. Our results show that if time limitation is used, the firm
should not disable any full version capabilities. In the absence of network externalities, time-limited shareware is superior to functionality-limited shareware as a marketing tool. Beyond a certain level of network externalities, however, functionality limitation becomes more favorable. Overall, regardless of the type of use restriction, network externalities tend to increase the firm’s profit. Counter-intuitively, we show that network externalities allow the firm to increase the full
version price at the expense of the size of the customer base in the early stages of introducing the software to the market.