Some Estimates of the Value of Software
Total Page：16
File Type：pdf, Size：1020Kb
Some Estimates of the Value of Software by Yu-Ting Kuo Bachelor of Science in Applied Mathematics National Tsing-Hua University, Hsinchu Taiwan, Republic of China (1988) Submitted to the Department of Civil and Environmental Engineering in Partial Fulfillment of the Requirements for the Degree of Master of Science in Operations Research at the Massachusetts Institute of Technology May 1994 © 1994 Massachusetts Institute of Technology. All rights reserved Signatureof Author. - Operations Research Center and Dipartment of Civil and Environmental Engineering <';7 it··~ May 12, 1994 Certifiedby - ' 1i/ )' Erik Brynjolfsson Assistant Professor of Information Technology and Management Thesis Supervisor Certified by- - Steven R. Lerman Professor of Civil and Environmental Engineering Thesis Reader Certified by by _-v- Richard C. Larson Professor of Electrical Engineering and Computer Science Co-tector, Operations Research Center Certified by Joseph M. Sussman Chairman_ Denartmental- U--- U ConmmitteeV V - I Cw onVi _LUUradunat L .A s tndioes_ vL M iSSAM S oFTFIIFj JULer2a169A RIES IIR 1RIS4 Some Estimates of the Value of Software by Yu-Ting Kuo Submitted to the Department of Civil and Environmental Engineering on May 12, 1994 in partial fulfillment of the requirements for the degree of Master of Science in Operations Research ABSTRACT Many factors might affect the pricing and purchase decision of a software package. For example, the intrinsic features of the software, the prices and capabilities of other competing programs, compatibility, and network externality effects. When considering such factors in pricing and purchase decisions, it is very important to investigate and understand the underlying relationships and their impact on the decisions. In this research work, we concentrate on how product features affect the pricing and purchase decisions of microcomputer software packages. We develop hedonic models to determine which product features play important roles on the pricing and purchase decisions for microcomputer word processing software from 1987 to 1991. In particular, a special effort is made to study and identify the effect of standards and network externalities. We find that real, quality-adjusted prices for word processors have fallen by an average annual rate of 4% over this period. Further we test for and find strong network externality effect in the DOS word processor market. We also find that overpriced programs will result in the loss of market share. Thesis Supervisor: Erik Brynjolfsson Title: Assistant Professor of Information Technology and Management Thesis Reader: Steven R. Lerman Title: Professor of Civil and Environmental Engineering ACKNOWLEDGMENT I would like to thank Professor Erik Brynjolfsson -- my thesis advisor and Professor Chris Kemerer, for their constant advice, teaching and generous support during this project, and Professor Steven R. Lerman, who kindly served as my thesis reader, for his invaluable comments and suggestions. Special thanks to Professor Harilaos Koutsopoulos of Carnegie Mellon University, Professor B. Curtis Eaves of Stanford University, Dr. Ko-Wei Lih and Dr. Yeong- Nan Yeh of Academia Sinica, Professor D. Frank Hsu of Fordham University, Professor J. Chuan and Professor C. T. Chao of National Tsing-Hua University, for their continual encouragement and support these years. I also wish to thank my friends for their supports and friendships during my stay at M.I.T., and in particular, I would like to acknowledge the following persons: Douglas Chan and Minghsun Liu, with their generous donations of a 386 motherboard, 12 MB RAM, and a 250MB hard drive, I could stay home and work as late as I wanted. Yu-Ming, and Phillip Chen, for their spiritual supports. Chih-Che Tsai, for the good discussions on regression analysis and general supports during my thesis writing. Paula Herndon, for proofreading part of this thesis, and the great time we always have. Qi Yang, Qin Chu, Bill Kaliardos, Qiang Feng, and Steve Barkin, for their friendships over my years in graduate school. Finally, I would like to dedicate this thesis to my parents, and my fiancee Hui-Chi Wu, who always stand behind me, I owe them too much. 3 Table of Contents Page ABSTRACT .......................................................................................................... 2 ACKNOW LEDGM ENT ........................................................................................ 3 Table of Contents ...................................... ................... 4......... List of Tables ........................................................................................................ 6 List of Figures ......... 7.............................................................................................7 Chapter 1. Introduction........................................................................................ 10 1.1 Background .......................................................... 10 1.2 Objective .......................................................... 11 1.2.1 Intrinsic Product Features ...................................................... 11 1.2.2 Network Externalities and Related Factors ............................ 12 1.3 Prior W ork .......................................................... 14 1.3.1 Intrinsic Product Features ...................................................... 14 1.3.2 Network Externalities, Compatibility and Standards ............ 16 1.4 Structure of the Thesis .......................................................... 17 Chapter 2. Research and Analysis Approach ........ ....................................... 19 2.1 The General Hedonic Model for W ord Processors ............................... 19 2.1.1 Hedonic Variables ............................................................... 20 2.2 The Data .......................................................... 26 2.2.1 Data Collection ........................................ .................. 26 Chapter 3. Hedonic Price Estimation Equation .................................................... 30 3.1 The Forms of Hedonic Equations ........................................................ 30 3.2 Base Hedonic Models ........................................ .................. 31 3.2.1 Base Hedonic Equation ......................................................... 31 3.2.2 Actual and Predicted Product Prices ...................................... 43 3.2.3 Base Hedonic Models: 1987-1988 vs. 1989-1991 .................. 44 3.3 Alternative Hedonic Model .......................................................... 47 3.3.1 Alternative Hedonic Models: 1987-1988 vs. 1989-1991 ......... 50 3.4 Network Externalities ........................................ .................. 53 3.4.1 Compatibility and Make Effect. ................................. 54 3.4.2 Installed Base .......................................................... 58 Chapter 4. Market Share Estimation ........................................ .......... 62 4.1 Are Overpriced Products Losing Market Share ? ................................. 62 4.1.1 Market Share Estimation Model ............................................ 64 4.1.2 Market Share Estimation Model on Individual Products ........ 66 4 Table of Contents Chapter 5. Conclusions........................................................................................ 70 5.1 Summary of Major Findings ............................................ 70 5.2 Future Research ............................................ 72 Appendix A. Variables: Definitions and Descriptive Statistics ........................................ 74 Appendix B. More Hedonic Regression Results ........................................ .... 92 Appendix C. More Market Share Regression Results ........................................ .... 98 Bibliography ............................................ 99 5 List of Tables Page Table 2.1 Distribution of Samples by Year and Operating Systems .................... 28 Table 2.2 Distribution of Sample by Vendor ...................................................... 29 Table 3.1 Base Model Regression Result ........................................................... 37 Table 3.2 Feature/Price Comparison between Operating Systems ....................... 38 Table 3.3 Background Printing Distribution ....................................................... 41 Table 3.4 The Distribution of WYSIWYG by Year ............................................ 41 Table 3.5 Predicted vs. Real List Prices -- Base Model ...................................... 43 Table 3.6 1987-1988 Base Hedonic Regression Result ....................................... 45 Table 3.7 1989-1991 Base Hedonic Regression Result ....................................... 46 Table 3.8 Alternative Hedonic Regression Result . ................................. 49 Table 3.9 Predicted vs. Real List Prices -- Alternative Model ............................. 50 Table 3.10 1987-1988 Alternative Hedonic Model ............................................... 51 Table 3.11 1989-1991 Alternative Hedonic Model ............................................... 52 Table 3.12 Top Word Processor Seller by Year . ................................... 54 Table 3.13 Model considering Network Externality ............................................. 59 Table 3.14 Network Externality Model (DOS) ..................................................... 60 Table 4.1 Average Feature/Price by Manufacturer .............................................. 63 Table 4.2 WordStar for DOS Sales (1987-1991)