Underlying Consumer Heterogeneity in Markets for Subscription-Based IT Services with Network Effects.

Author List: Niculescu, Marius F.; Shin, Hyoduk; Whang, Seungjin;
Information Systems Research, 2012, Volume 23, Issue 4, Page 1322-1341.
In this paper we explore the underlying consumer heterogeneity in competitive markets for subscription-based information technology services that exhibit network effects. Insights into consumer heterogeneity with respect to a given service are paramount in forecasting future subscriptions, understanding the impact of price and information dissemination on market penetration growth, and predicting the adoption path for complementary products that target the same customers as the original service. Employing a continuous-time utility model, we capture the behavior of a continuum of consumers who are differentiated by their intrinsic valuations from using the service. We study service subscription patterns under both perfect and imperfect information dissemination. In each case, we first specify the conditions under which consumer rational behavior supported by the utility model can explain a general observed adoption path, and if so, we explicitly derive the analytical closed-form expression for the consumer valuation distribution. We further explore the impact of awareness and distribution skewness on adoption. In particular, we highlight the practical forecasting importance of understanding the information dissemination process in the market as observed past adoption may be explained by several distinct awareness and heterogeneity scenarios that may lead to divergent adoption paths in the future. Moreover, we show that in the later part of the service lifecycle the subscription decision for new customers can be driven predominantly by information dissemination instead of further price markdowns. We also extend our results to time-varying consumer valuation scenarios. Furthermore, based on our framework, we advance a set of heuristic methods to be applied to discrete-time real industry data for estimation and forecasting purposes. In an empirical exercise, we apply our methodology to the Japanese mobile voice services market and provide relevant managerial insights from the analysis.
Keywords: consumer information awareness; consumer utility models; network effects; subscription-based IT services
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#0 0.197 information types different type sources analysis develop used behavior specific conditions consider improve using alternative understanding data available main target
#226 0.163 models linear heterogeneity path nonlinear forecasting unobserved alternative modeling methods different dependence paths efficient distribution probabilities demonstrate observed heterogeneous probability
#112 0.151 services service network effects optimal online pricing strategies model provider provide externalities providing base providers fee complementary demand offer derive
#5 0.115 consumer consumers model optimal welfare price market pricing equilibrium surplus different higher results strategy quality cost lower competition firm paper
#242 0.113 market competition competitive network markets firms products competing competitor differentiation advantage competitors presence dominant structure share using incumbent make important
#110 0.073 theory theories theoretical paper new understanding work practical explain empirical contribution phenomenon literature second implications different building based insights need
#49 0.065 adoption diffusion technology adopters innovation adopt process information potential innovations influence new characteristics early adopting set compatibility time initial current