Freemium of Digital Products with Small-World Network

"Freemium" is a popular business model adopted by the vendors of digital products, and it has aroused extensive attention in the academia. The existing research studies commonly explore the business model from the perspective of network effect, but lack the attention to the small-world features of network effect. In order to explore the effect of the small-world network, the current work presents a two-period optimization model of monopolist. The optimization model is incorporating with the Freemium model and the small-world feature of consumer base. The optimization model is solved analytically, and the comparative static results show that if the integrating network effect caused by the strong and weak relationship group is sufficiently high (or the small-world feature of the user group is prominent), the user group network exerts a positive effect; if the integrating network effect is not sufficiently high (or the small-world feature of the user group is not prominent), the user group network exerts a negative effect; especially, if the integrating network effect is low or moderate, the premium product is supposed to be free for the consumers. The conclusions enrich the understanding on the operation of digital products firms in the academia and industry.