Optimal Freemium Strategy for Information Goods in the Presence of Piracy

Information goods providers adopt freemium strategies to reduce consumer uncertainty and combat piracy. However, offering a free version can cannibalize the demand for the premium version. In this paper, we investigate the tradeoff between the effect of decreasing uncertainty and that of cannibalization, and explore the conditions under which firms should adopt freemium strategies in the presence of piracy. We employ a two-stage consumer perception change model to examine optimal pricing and the feasibility of a freemium strategy. Our results show that a higher piracy enforcement level may hurt the firm if the consumer perception increment concerning the quality of a premium version is higher than the quality perception increment of the pirated version. This indicates that the presence of a pirated version is not always harmful for the firm. We also find that when the consumer perception increment concerning the quality of a premium version is lower than the quality perception increment of the free version, the traditional strategy (i.e., not offering a free version) weakly dominates the freemium strategy. In contrast, when the quality perception increment derived from the premium version is higher than that of the free version, the optimal strategy depends on the piracy enforcement level and the change in consumer quality perception. If the piracy enforcement level is high, the freemium strategy dominates the traditional strategy when the consumer quality perception increment associated with the premium version is higher than a given threshold. However, for a low piracy enforcement level, the traditional strategy dominates in the context of both a high consumer quality perception and a low consumer quality perception increment concerning the pirated version versus the free version.