Pricing Security Software: Theory and Evidence

This paper presents a model of multi-product pricing for consumer security software. It highlights two aspects unique to this kind of software. The …rst is a supply-side e¤ect relating to the security software update process that alters its cost structure, and the second is a demand-side e¤ect relating to the fact that customers often get free substitutes for components of security software suites, which are bundled with products unrelated to computer security. We develop an analytical model that captures each of these e¤ects. In contrast with prior results, this model predicts the optimality of mixed bundling as a pricing strategy; we show how removing the e¤ects we highlight leads to the optimality of pure bundling, which is consistent with past work on information goods. The analytical model also predicts that the “discount" on a bundled software suite increases as the variable cost of high-quality updates goes up. We test the predictions of our model using data on security software demand and pricing we have gathered from Amazon.com, and …nd preliminary support for our theory. There are a number of aspects of security software that make its economics somewhat di¤erent from those of traditional consumer software. First, the quality of security software depends less on the range of end-user features incorporated into the software, and more on the reliability and