Freeware as a competitive deterrent

Using perfect foresight and adaptive models, this paper examines the effect of competitor asymmetry, consumer sensitivity to incentives and adaptive processes on freeware strategies and competitive outcomes. Four roles played by freeware in competitive markets are identified - it can be a mechanism to build or speed up the growth of a network without the need to lower prices on the commercial version, a deterrence mechanism, a hindrance to a rival's network building efforts, and a coordination device in the presence of forward looking consumers. We determine the optimal prices of the commercial version, the decisions to introduce freeware and the freeware qualities for both competing firms.