Effect of network externalities on software pricing

In this paper, we use an intertemporal monopoly pricing model to examine the pricing strategies for selling and renting packaged software using the World Wide Web. A two stage setup is used to model the versioning of software. The externalities created by renting and selling the software is incorporated in the model. The preliminary results obtained by solving the problem using numerical methods such as Kuhn-Tucker constrained optimization provided insight into the pricing strategies. We found that for high levels of network externalities, the prices in the second period are substantially higher. Profits also increase monotonically with the intensity of the network effect