Price Competition between On-Premises Vendor and 'Software as a Service' Vendor with Software Upgrades

This research studies the price competition between a Software-as-a-Service (SaaS) vendor, who adopts subscription-based pricing scheme, and an on-premises vendor, who uses perpetual license scheme. The SaaS vendor decides its subscription price, and the on-premises software vendor decides the initialversion price in the first period, and the upgrade price in the second period. We find that firms' pricing strategy largely depends on the differences in customizability and implementation costs between the two vendors: (1) the impact of the customizability of the SaaS software is non-monotonic. More specifically, for SaaS software with low or moderate customizability, an increase in customizability can hurt the SaaS vendor's profit if the on-premises software is not costly to implement, though it always harms the on-premises software vendor; when the customizability of the SaaS software is high, however, an increase in customizability benefits both types of software vendors; (2) it is possible for the SaaS vendor to become a monopolist (when the SaaS software has high customizability, and the on-premises software is sufficiently costly to implement), but it is never possible for the on-premises vendor to drive the SaaS vendor out of the market