This paper presents a model of monopoly incentives for software sold as an ongoing service that suggests why this licensing method is likely to lead to reduced innovation and increased pricing. Price, features, and compatibility determine the adoption rate of software. Monopolies tend to form in software because compatibility is often the most important goal of customers. The existence of previous versions of software has disciplined monopolists because customers are unlikely to upgrade unless the new version provides substantially higher value than the one that they own. The service-based model eliminates this important substitute and thus locked-in customers are more likely to continue paying for the product even if its price is higher and its features remain the same. Potential policy alternatives include laws that give customers the option of owning software and the ability to continue using previous versions when purchasing new corporate systems.
ASJC Scopus subject areas
- Management of Technology and Innovation