Seminar (Dept. of Management Science and Engineering)

Title: Provision of Software Features amid Hardware Commoditization: Standard or Optional?

Speaker: Minyue Jin (School of Economics and Business Administration Chongqing University)

Time: 10:00 (Wednesday), October 11th, 2023

Venue: Online Meeting

Language: Chinese/English

ABSTRACT:

Motivated by the trend of hardware becoming commoditized and software driving differentiation in various industries, we explore whether firms should provide software features as standard or optional in the presence of hardware commoditization. We address this by studying a model in which two competing firms sell undifferentiated hardware along with vertically differentiated software. Competition motivates the high-quality firm to offer the undifferentiated hardware as a standalone product to attract lower-end customers away from the low-quality firm. When the cost of the hardware is high, the low-quality firm sets a relatively low add-on price, incentivizing lower-end customers to purchase its hardware along with its software. In this case, both firms sell software as standard. However, when the hardware cost is low, the low-quality firm offers the software as an option at a relatively high price, resulting in both firms selling software as optional. Interestingly, an increase in the hardware cost might benefit both firms by softening competition. If firms have commitment powers, the high-quality firm does not always benefit from a larger quality advantage in the software. Our analysis highlights the importance of hardware costs in shaping firms’ strategies toward software provision, even in the face of hardware commoditization.