Tepper School of Business
Software Pricing: Pay-Per-Use Versus Perpetual Licensing
Piracy has been a major problem for perpetually licensed software. This paper discusses how a proposed pay-per-use licensing mechanism can offer technology-based IP protection against piracy. We provide an analytical framework to examine the economic implications of per-per-use versus perpetual licensing for a monopolist software vendor facing heterogeneous consumers in terms of marginal usage benefits and acquisition costs for pirated software. We study both utility software and general software markets with possible linear network effects. Our analyses show that the potential piracy rate, user inconvenience costs incurrred with pay-per-use licensing, and the strength of network effects are important factors determining the optimal software licensing choice. We find that pure pay-per-use licensing in a market with low inconvenience costs or high potential piracy will yield higher profits than perpetual licensing or mixed licensing. The presence of positive network effects also favors pay-per-use licensing over perpetual licensing; if the network effects is strong, pay-per-use will always dominate perpetual licensing regardless of the inconvenience cost or the potential piracy rate. With higher potential piracy, lower inconvenience costs, and stronger network effects, pay-per-use licensing becomes not only more profitable to the vendor but also more welfare-enhancing compared with perpetual licensing.
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