Support Forums and Software Vendor’s Pricing Strategy

Practice and Policy Oriented Abstract Forums such as Quora, Stack Exchange, Yahoo!Answers, Office Forum, and Photoshop Guru provide a free alternative to the paid support services offered by various software vendors; it is not obvious how a vendor should react to this competition. Specifically, should the vendor sell the product and support separately or should it offer them as a bundle? In practice, we observe both strategies in play, suggesting that there may be merits to each. This paper develops a microeconomic model to uncover how the presence of a forum may shape a vendor’s pricing strategy. Our analysis reveals that a forum actually plays a dual role. On the one hand, the forum generates a shadow competition for the vendor-provided support by offering an imperfect substitute. On the other, the forum elevates the appeal of the software product by complementing it with free support. This dual role has interesting implications. When the forum is either weak or strong, in terms of its reach among consumers or its effectiveness in addressing their needs, the vendor’s best strategy is to sell the product and support separately. When the strength is moderate, however, it becomes optimal for the vendor to just sell a bundle. The paper describes the reasons behind this surprising nonmonotonicity in the vendor’s strategy. This research develops a microeconomic model to study the impact of support forums on the software industry. Motivated by the rapid growth of forums such as Stack Exchange, Quora, and Yahoo! Answers, we examine what impact they could have on a software vendor’s pricing strategy. Because these forums provide an alternative, free source for obtaining software support, one might suspect that the shadow competition from them would eat into the profit the vendor makes from selling support services. We find that, although such a conclusion could be right at the forum’s initial and formative stages, it may not hold later, especially if the forum generates enough momentum. This is because forums, besides playing a substitutive role, also have a complementary effect. At the initial stages, the substitutive role of the forum dominates. However, if and when the forum grows sufficiently, the complementary role eventually takes control. In the meantime, the vendor can try to mitigate the immediate losses and find temporary relief by adopting a strategy of bundling support services with the product.