Optimal Release Strategy for the Competing Software Vendors Based on Word-of-Mouth Effect
Yu Wang, Minqiang Li, Haiyang Feng, and Nan Feng
International Journal of Electronic Commerce,
Volume 24, Number 1, 2020, pp. 130-156.
Abstract:
In the software industry, early release or delayed release are important decisions for the competing software vendors in the presence of the word-of-mouth (WOM) effect. This paper explores the optimal release decisions of two competing software vendors in two periods according to their estimations about WOM generated by their products. We find that in most scenarios, the firm expecting to have advantaged WOM adopts what is called an early-release strategy, whereas the firm expecting to have disadvantaged WOM adopts a delayed-release strategy. Of interest, when one firm’s expected WOM is sufficiently disadvantaged, it will also adopt an early-release strategy as long as the competitor’s expected WOM is sufficiently advantaged, which will never occur in a monopoly setting. When both firms’ expected WOM are negative and not too small, a counterintuitive equilibrium may appear in which the firm expecting to have disadvantaged WOM adopts the early-release strategy and the other expecting to have advantaged WOM adopts the delayed-release strategy. Two firms will be caught in a prisoner’s dilemma in the duopoly market when both adopt the delayed-release strategy and the difference between the two firms’ expected WOM is sufficiently small. As the market growth rate increases (decreases), competitive firms are more likely to adopt the delayed-release strategy (early-release strategy). Further, compared with the optimal strategy in a monopoly setting, a software vendor is more likely to adopt an early-release strategy in the competition setting, and the probability of adopting an early-release strategy will be higher as the intensity of competition becomes stronger. Firms’ interests and the social planner’s interest can be aligned under certain conditions, but this is not always the case. Finally, we examine the firms’ optimal release strategies and quality design strategies when we assume a specific functional relationship between WOM and consumer requirement uncertainty and product quality.