Underlying consumer heterogeneity in markets for subscription-based IT services with network effects

Marius F. Niculescu*, Hyoduk Shin, Seungjin Whang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

20 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1322-1341
Number of pages20
JournalInformation Systems Research
Volume23
Issue number4
DOIs
StatePublished - Dec 2012

Keywords

  • Consumer information awareness
  • Consumer utility models
  • Network effects
  • Subscription-based IT services

ASJC Scopus subject areas

  • Management Information Systems
  • Information Systems
  • Computer Networks and Communications
  • Information Systems and Management
  • Library and Information Sciences

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