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Information Goods Upgrades: Theory and Evidence

Author

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  • Viard V. Brian

    (Stanford University, vbv_1998@yahoo.com)

Abstract

A substantial portion of information goods is sold through upgrades. I model a monopolist offering successive generations of an information good in a dynamic model. In each period, the monopolist offers up to two prices for each generation: a full price to those who have never purchased and a version upgrade price to consumers who own a previous generation. I employ an overlapping generations model with infinite-lived firms and consumers that reflects the effect of future profits on current decisions better than previous two-period models. The model's predictions accord well with data from the PC software industry. The model explains why: 1) firms issued version upgrades with every new generation, 2) firms provided a discount to those upgrading relative to first-time buyers and 3) late adopters commonly purchased the latest version at full price even though some earlier adopters with higher valuations did not upgrade to the latest version.

Suggested Citation

  • Viard V. Brian, 2007. "Information Goods Upgrades: Theory and Evidence," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-34, January.
    • Handle: RePEc:bpj:bejtec:v:7:y:2007:i:1:n:3
    DOI: 10.2202/1935-1704.1126
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    Cited by:

    1. Kristina Brecko, 2023. "New Features Free of Charge? Intertemporal Product Versions and Pricing in the Software Market," Marketing Science, INFORMS, vol. 42(1), pages 61-86, January.
    2. Tilson, Vera & Zheng, Xiaobo, 2014. "Monopoly production and pricing of finitely durable goods with strategic consumers׳ fluctuating willingness to pay," International Journal of Production Economics, Elsevier, vol. 154(C), pages 217-232.

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