These are some of my recent working papers. Comments and suggestions are welcome.
Software piracy and outsourcing in two-sided markets
co-authored with Masakazu Ishihara, 2019.
We examine the role of software piracy in digital platforms where a platform provider makes a decision of how much software to produce in-house and how much to outsource from a third-party software provider. Using a vertical differentiation model, we theoretically investigate how piracy influences software outsourcing decision. When piracy is intermediate, the loss in in-house software profits due to piracy outweighs the loss in licensing fee profits. As a result, an increase in piracy leads to more outsourcing. However, when piracy is high, it becomes too expensive for the platform provider to subsidize the software provider, resulting in a decrease in outsourcing. Moreover, when software variety is also endogenously chosen by the firms, the platform provider's incentive to develop software variety in-house depends not only on the return from software profits but also on the return from hardware profits. Under such a situation, an increase in piracy always leads to less outsourcing and less total software variety. To provide additional insights on the outsourcing decision, we conduct empirical analyses using data from the U.S. handheld video game market between 2004 and 2012. This market is a classical two-sided market, dominated by two handheld platforms (Nintendo DS and Sony PlayStation Portable) and is known to have suffered from software piracy significantly. Our regression results show that in this market, piracy increases outsourcing but has no effect on the total software variety.
Growth, popularity, and the long tail: Evidence from digital markets
co-authored with Gil Appel and Barak Libai, 2019.
The fact that the adoption rate of successful innovations is bell-shaped (cumulative S-shaped) is considered the basis for most insights and analyses of new product marketing. However, these insights have been largely based on the growth of popular durables and services. In contrast, contemporary digitized markets are largely comprised of a long tail of low-popularity products for which we have little evidence on which to base the expected shape of growth. We study the growth of close to 100,000 digital products in two markets; with product size ranging from 50 downloads, to hundreds of millions. We find that across various product categories, while indeed bell-shaped growth is the clear majority among the very popular products, for lower-popularity products, it becomes a minority, with growth dominated by an exponential-like decline (“slide”), or a combination of the first two, i.e., a slide and a bell (S&B). We examine the possible explanations for this phenomenon in the markets we analyze, and discuss some of the wide-ranging implications of our understanding of new product marketing in long-tail markets.
Customer transferal: Satiation and lifetime value for fast-moving hedonic experiences
co-authored with Michael Haenlein and Barak Libai, 2019.
Fast-Moving Hedonic Experiences (FMHEs) is a large market that includes products such as music streaming, mobile games, and YouTube videos. FMHE markets suffer from consumer satiation, where users enjoy the experience less with time. This results in temporal declining usage and reduced customer profitability. Behavioral research has suggested ways to affect the individual’s perception in order to mitigate the sense of satiation. Here we propose an alternative solution, which is becoming notable in digital markets such as mobile games: Instead of changing the customers, exchanging them. Using what is labeled in the industry “cross promotion” activities, customers are de-facto encouraged to churn the current brand toward an alternative destination. For internal cross promotion, the destination is to another product in the brand portfolio, where the customer is not yet satiated. In the case of external cross promotion, firms are aided by a platform that mediates among various brands. Using a customer lifetime value framework, we explore when, for whom, and how it is profitable to transfer a brand’s customers elsewhere.