Selling and Leasing Software with Network Externality

Previous studies suggested that a monopoly durable goods seller can useleasing to effectively avoid the time-inconsistent problem raised byCoase Conjecture. This paper extends those previous works by examiningthe monopoly seller's selling and leasing strategy for a special type ofdurable good --- software. We look at a software vendor that can sell(at a posted price) or lease his product where as a lesser he guaranteesthat the lessees will always have the latest version of the software. Weaddress some of the specific issues of implementing the selling and/orleasing policies at the packaged software market, including the impactof network externality, upgrade compatibility, and commitment on pricingin a dynamic environment. We show that by properly defining theirpricing structure, software vendors can segment the market andsecond-degree price discriminate the consumers. We also demonstrate howsoftware vendors can manage the trade-offs of selling and leasing toachieve a higher profit as well as the corresponding welfare effect onthe consumers.