Optimal software upgrade strategy: Should we sell products or premium services in the presence of piracy?

This research explores the software upgrade strategy in the presence of piracy. When a firm introduces an upgrade, it can adopt a freemium strategy, by offering free products and paid services, or by adopting traditional strategy, and continuing to sell products. We develop a two-period joint model of upgrading and piracy, and use it to compare these two strategies. We find that whether a firm should adopt copyright protection depends on the reservation price for unethical consumers. Additionally, the presence of piracy and premium services can reduce price competition between the original product and the improved version. Freemium strategy always dominates traditional strategy except when the two conditions are satisfied. First, the differentiation between the original product and the improved version in terms of consumer preference must be relatively small. Second, the differentiation between the original product and the improved version in terms of product value must be moderate.